UNITED STATES DISTICT COURT SOUTHERN DISTRICT OF NEW YOR K IN RE BIOVAIL CORPORATION + Master File No . 03-CV-8917 (RO) SECURITIES LITIGATIO N CONSOLIDATED AMENDED CLASS ACTION COMPLAIN T BERNSTEIN LITOWITZ RERGER & GROSSMANN LL P Daniel L . Berger (DB-7748) J . Erik Sandstedt (JS 9118) Javier Bleichmar (JB-0435) 1285 Avenue of the Americas New York, New York 10019 Tel : 212-554-140 0 Fax : 212-554-1444 Co-Lead Counsel and Counsel for Co-Lead Plaintiff Ontario Teachers ' Pension Plan Board MILBERG WEISS BERSHAD & SCHULMAN LL P Sanford P . Dumain (SD-8712) Ann M . Lipton (AL-3010) One Pennsylvania Plaza New York, New York 10119 Tel : 212-594-530 0 Fax : 212-868-122 9 Co-Lead Counsel and Counsel for Co-Lead Plaintiff Local 282 Welfare Trust Fund
Transcript
UNITED STATES DISTICT COURTSOUTHERN DISTRICT OF NEW YORK
IN RE BIOVAIL CORPORATION + Master File No. 03-CV-8917 (RO)SECURITIES LITIGATION
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
BERNSTEIN LITOWITZ RERGER& GROSSMANN LLPDaniel L. Berger (DB-7748)J . Erik Sandstedt (JS 9118)Javier Bleichmar (JB-0435)
1285 Avenue of the AmericasNew York, New York 10019Tel : 212-554-1400
Fax: 212-554-1444
Co-Lead Counsel and Counsel for Co-LeadPlaintiff Ontario Teachers ' Pension PlanBoard
MILBERG WEISS BERSHAD &SCHULMAN LL PSanford P . Dumain (SD-8712)Ann M . Lipton (AL-3010)
One Pennsylvania PlazaNew York, New York 10119Tel: 212-594-530 0Fax: 212-868-122 9
Co-Lead Counsel and Counsel for Co-LeadPlaintiff Local 282 Welfare Trust Fund
1 . On October 3, 2003, Biovail Announced That It Had Missed It sThird Quarter Estimates , But Lied About the Reasons to Hide theFact that Revenue from Cardizem LA Had Been Disastrous . . . . . . . . . . . . . . . . . . . 57
3 . U.S. and Canadian Authorities Commenced Investigations as aResult of Biovail's Third Quarter Earnings Disclosures -- th eCompany Lied About the Existence of the Canadian Investigation . . . . . . . . . 69
Lead Plaintiffs Ontario Teachers' Pension Plan Board ("Ontario Teachers") and Local
282 Welfare Trust Fund ("Local 282 Welfare Fund") (together "Lead Plaintiffs") bring this
action as a class action, individually, and on behalf of all other persons and entities who
purchased the publicly traded common stock of Biovail Corporation ("Biovail" or the
"Company") during the period February 7, 2003, through and including, March 2, 2004 (the
"Class Period") .'
1 . NATURE OF THE ACTION
1 . By February 2003, Biovail was a pharmaceutical company whose market value
depended entirely on two drugs : Cardizem LA and Wellbutrin XL . The successful launch of
these drugs would mark the transition of Biovail from a relatively minor player . in the
pharmaceutical industry into a "specialty pharmaceutical" business with valuable assets driving
its revenue and growth. As noted by one analyst who followed Biovail in late 2002, "[t]wo
upcoming major new products launches remain critical in enhancing Biovail's earnings growth
visibility, including the anticipated fourth quarter approval of Cardizem [LA] (hypertension)
followed by the planned second half 2003 introduction of a new once-daily form of Welibutrin
[XL] through GlaxoSmithKline." Another analyst mimicked this analysis in early February
2003, when she emphasized that "Cardizem LA is an essential part of our Biovail investment
thesis as it is their first self-developed, self-launched product, pushing them into the Specialty
Pharmaceutical business model from a historical drug delivery business model . "
2. Fully cognizant of the importance of these key products, on February 7, 2003,
Biovail made two critical public announcements . First, it announced that Cardizem LA had bee n
' The Court also appointed Houston Municipal Employees' Pension System ("HMEPS") as Lead Plaintiff on March3, 2004. HMEPS, however, did not purchase Biovail common stock during the Class Period alleged in thiscomplaint, February 7, 2003 to March 2, 2004 . Accordingly, HMEPS will file a notice of withdrawal as Co-LeadPlaintiff shortly .
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approved by the Food and Drug Administration (the "FDA") . Second, it gave Wall Street
analysts projections for upcoming sales of bnth Cardiz.em LA and Wellhutrin XL, which were
based entirely on the successful launches of these products . Biovail informed the market that it
would commercially launch Cardizem LA on April 2, 2003, and then Wellbutrin XL in the third
quarter of 2003 . Biuvail's revenue projection for the Cardizem family of drugs was $140-$200
million . These figures included internal projected sales of Cardizem LA of $90 million to $100
million. Subsequently, Defendants repeatedly assured investors that Biovail was making great
strides in promoting and distributing Cardizem LA, and that the launch of this product had been
a tremendous success . For example, on April 29, 2003, Biovail issued a press release entitled,
"Biovail Reports Positive Cardizem LA Launch Results ." One week later, on May 7, 2003, the
Company issued a new press release with the headline, "Biovail's Cardizem LA Obtains
Favorable Formulary Coverage; Access to over 74 Million Managed Care Lives"
3. The Defendants knew, however, that these self-promoting press releases and th e
initial projections for Cardizem LA were materially false and misleading . The truth of the matter
was that at the time these projections were made, Biovail was experiencing severe problems
manufacturing Cardizem LA, and there was absolutely no way that Biovail could generate
sufficient quantities of this product to support a successful launch in April 2003 . In fact, former
employees stated that they specifically told the Defendants that the maximum sales of Cardizem
LA Biovail could expect in 2003 was $50 million (actual sales in 2003 were $47 .7 million), and
that the $90-$100 million figures that Defendants wanted to utilize were "outlandish ."
Nevertheless, Defendants issued materially false and misleading projections, knowing that they
would mislead investors and artificially inflate Biovail's stock price .
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4. The Defendants then concocted a scheme to disguise the fact that they did not
have enough product to support a successful launch of Cardizem LA . Specifically, the
Defendants understood that Wall Street analysts would be looking at the number of prescriptions
that doctors wrote for Cardizem LA in assessing the success of the launch . So, in advance of the
launch, they instituted what they called the PLACE Program (Proving LA through Clinical
Experience) . The PLACE program was billed by the Company as a "clinical experience"
program aimed at developing meaningful, scientific data for Cardizem LA . However, in reality,
PLACE was nothing more than a vehicle to bribe doctors to write prescriptions for Cardizem
LA. Specifically, doctors were paid between $1,000 and $1,500 for every 10 to 15 prescriptions
they wrote . Not surprisingly, over 17,000 doctors wrote tens of thousands of prescriptions for
Cardizem LA. Once the PLACE program ended, however, doctors had no financial incentive to
continue prescribing the drug and the number of prescriptions written quickly dropped off .
Tellingly, no meaningful scientific data was generated, and no significant client base for the drug
was established. Nevertheless, based in large part on the sheer number of prescriptions that were
written through the PLACE program, Biovail touted the launch of Cardizem LA as a terrific
success .
5. Defendants' fraudulent scheme quickly fell apart . In the third quarter of 2003 ,
Cardizem LA generated a mere $6 .2 million in revenues, causing the Company to miss its
earnings projections by tens of millions of dollars . Defendants knew, however, that they could
not admit that Cardizem LA was a failure, for to do so would drive the stock price into the
ground. So they continued to deceive investors by lying about the root causes of Biovail's
earnings shortfall .
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6. Specifically, the Defendants took the unconscionable step of exploiting a tragic --
indeed, fatal -- accident involving one of their trucks . On October 1, 2003, just after the close of
the third quarter, a Biovail truck was involved in a multi-car accident that resulted in eight deaths
and fifteen hospitalizations. The truck, in fact, contained a minimal amount of Biovail's new
drug, Wellbutrin XL, which had been shipped just hours before the close of the quarter . But
seeing an opportunity to explain away the Cardizem LA debacle, which had caused third quarter
earnings to fall well short of earnings projections, Defendants publicly announced that the truck
held approximately $15 to $20 million worth of Wellbutrin XL, and that the value of the
medication on the truck would have to be eliminated from its third quarter 2003 revenues
forecast . They further announced that as a result of the accident and two other' circumstances
unrelated to the botched launch of Cardizem LA -- i .e ., an alleged "backorder" of Cardizem CD
and unexpected lower revenues from another drug, Prilosec Biovail would miss analysts'
earnings expectations for that quarter.
7 . The market was quick to react. The stock price dropped from $37.77 on October
2, 2003, to $31 .10 at the close of trading on October 3, 2003 - approximately 20% . Within days,
at least one analyst questioned the veracity of Biovail's statements about the amount of
Wellbutrin XL in the truck. Throughout this period, however, Defendants continually denied
that they had lied about the traffic accident . They also lied about several other facts that would
have tipped investors, off to the fact that the Defendants had committed a massive fraud . For
example, when asked point-blank whether he had pledged any of his Biovail stock for personal
"nu." In fact, Melnyk had pledged his stock against two personal lines of credit, totaling $72
million, a circumstance that provided strong motive for him to artificially inflate the value o f
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Biovail stock . Similarly, Biovail specifically denied that it was the subject of an investigation by
the Ontario Securities Commission ("OSC"), when, in fact, an investigation into suspicious
trading in Biovail stock had been commenced by that regulatory agency. This false statement
prompted the OSC to take the extraordinary step of publicly announcing its investigation to clear
up any "misunderstanding among investors as to what the facts were ."
8 . It was not until the Company finally announced its financial results for fiscal 200 3
that investors finally understood the extent of the instant fraud . On March 3, 2004, Biovail
announced that its fourth quarter and full year financial results had once again fallen far short of
its revised earnings guidance, which had just been reduced on October 30, 2003 . The Company
also finally admitted that the quantity of Wellbutrin XL involved in the October 1, 2003 accident
was $5 million, not as much as $20 million as they had continually professed, and that th e
mysterious "backorder" of Cardizem CD -- the second justification for Biovail's earning miss in
the third quarter 2003 -- had never actually existed . Then, in May 2004, the true reasons for
Biovail's dramatic shortfall in the third quarter of 2003 became glaringly obvious for the first
time: projected blockbuster sales of Cardizem LA had never materialized . Indeed, in Biovail's
Report on Form 20-F filed with the Securities and Exchange Commission (the "SEC") on May
14, 2004 (the "2003 20-F"), describing the Company's results for 2003, the Company finally
admitted that sales of Cardizem LA in the third quarter had amounted to only $6 .2 million -- tens
of millions of dollars lower than the Company's original projections .
9. Of course, by that time, the damage was done. As a result of the Defendants'
fraud, Biovail's stock price dropped from a Class Period high of over $50 per share to
approximately $18, and investors, in turn, suffered hundreds of millions of dollars in damages .
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IT . JURISDICTION AND VENU E
10 . The claims alleged herein arise under Sections 10(b) and 20(a) of the Securitie s
Exchange Act of 1934 (the `Exchange Act"), 15 U .S.C . §§ 78j(b) and 78t(a), and Rule 10-5, 1 7
C.F.R. § 240.1Ob-5 promulgated thereunder .
11 . The jurisdiction of this Court is based on Section 27 of the Exchange Act, 1 5
U.S.C. § 78aa, and 28 U .S .C. §§ 1331 and 1337 .
12. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8
U.S.C. § 1391(b) . The Company's stock traded in the New York Stock Exchange (the "NYSE" )
at all relevant times and Melnyk, upon information and belief, maintains a residence in thi s
district .
13 . Pursuant to the "effect test" of extraterritorial jurisdiction, this Court may
properly exercise subject matter jurisdiction over the claims of (a) all investors who purchased o r
acquired Biovail common stock on markets located in the United States, and (b) investors base d
in the United States who purchased or acquired Biovail common stock regardless of where thos e
securities traded .
14. This Court may also properly exercise subject matter jurisdiction over the claim s
of foreign class members who acquired Biovail common stock on foreign markets under the
"conduct test," which provides that a federal court has subject matter jurisdiction if (a) the
Defendants' activities in the United States were more than "merely preparatory" to a securities
fraud conducted elsewhere, and (b) these activities or culpable failures to act within the United
States caused the claimed losses .
15 . Defendants engaged in extensive fraud-related conduct in the United States ,
which artificially inflated earnings, by, inter alia, (i) failing to disclose severe manufacturin g
problems with Cardizem LA, (ii) conducting a Cardizem LA sales launch meeting, in Flo rida, in
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March 2003, in which upper level sales managers were instructed not to disclose to Biovail's
sales representatives that Biovail did not have sufficient quantities of Cardizem LA to launch the
product, (iii) failing to disclose payments to doctors in the United States pursuant to the PLACE
program, (iv) conducting earnings conference calls with Wall Street research analysts located in
the United States in which Defendants made false and misleading statements,, (v) filing false and
misleading financial statements with the SEC, and (vi) issuing financial statements that were
false and misleading pursuant to U.S . Generally Accepted Accounting Principles ("GAAP") . As
a result of this fraudulent conduct in the United States, the SEC and the U.S. Attorney's Office
are conducting investigations of the Company's actions that occurred here-
16. As set forth in detail below, the fundamental fraud at issue here concerns the
launch of Cardizem LA and subsequent lack of sales of the drug in the United States . The FDA
approved Cardizern LA for sale in the United States on February 7, 2003, which inarks the
beginning of the Class Period . Biovail issued false and misleading statements leading the
investing public to believe that the launch of Cardizem LA in the United States was a success
and that sales of the drug were spectacular . In reality, Biovail faced severe manufacturing
problems with Cardizem LA .
17. Biovail concealed its manufacturing problems with Cardizem LA in two ways .
First, Biovail conducted a national sales meeting on March 15, 2003 in Orlando, Florida in which
it misled its sales representatives and did not inform them that the Company could not
manufacture sufficient quantities of Cardizem LA . Senior management specifically instructed
senior sales managers not to disclose to the sales force that manufacturing of Cardizem LA faced
severe problems . Second, the Company launched a marketing campaign in the United States
called PLACE, which Biovail misleadingly explained was a clinical experience program . The
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Company failed to disclose that PLACE paid U.S . doctors $1,000, or more, for prescribing
CaidiLcui LA to a certain number of patients, and that it was nothing more than a bribing scheme
designed to inflate the prescriptions written by doctors . All the conduct therefore took place in
this country. The prescriptions were written in the United States, the payments to doctors also
were made here, and the ensuing investigation by U .S . federal authorities is based on events that
occurred within their jurisdiction .
18. In addition to the fraudulent conduct that took place in the United States, th e
Company is primarily a United States company, at least in terms of the percentage of sales and
operations that take place in this country compared to any other nation . Biovail's 2003 20-F
admits as much, stating, "[o]ur primary market is the U .S." Further, in 2003, which includes 11
of the 13 months in the Class Period, Biovail reported S548 million in revenues from product
sales in the United States, out of total product sales of $632 million, or 87% . Tluce of its four
manufacturing plants are located in the United States, specifically in Chantilly, Virginia ; Dorado,
Puerto Rico, and Carolina, Puerto Rico . Biovail's sales, marketing and administration offices in
Bridgewater, New Jersey comprise 110,000 square feet, which constitutes 66% of the
Company's total business offices, excluding manufacturing plants and R&D facilities . The
offices in Bridgewater, New Jersey are the largest sales and marketing offices of the Company,
which only has one other sales and marketing office, located in Canada, which is half the size
and also includes the Company's executive suites .
19. Moreover, the Company's common stock trades in the NYSE, and as of April 30,
2004, almost 90% of the shares of Biovail common stock were owned by holders of record
located in the United States .
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20 . Finally, a significant portion of Defendants' false and misleading statements wer e
initially made in the United States, and are contained in Biovail's SEC filings, Biovail's press
releases and SEC filings were broadly disseminated within the United States through the means
and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate
telephone and electronic communications, and the facilities of national securities exchanges .
Biovail also conducted investor conferences and conference calls with financial analysts tha t
took place, in large measure , in the United States, pursuant to U .S. financial disclosure
guidelines and GAAP accounting regulations .
21 . The foregoing facts clearly demonstrate that Biovail's conduct in the United
States was not "merely preparatory" to Defendants' scheme to defraud . Instead, Defendants '
United States conduct directly caused the staggering losses suffered by investors .
22 . In connection with the acts, transactions and conduct alleged herein, th e
Defendants used the means and instrumentalities of interstate commerce, including the Unite d
States mails, interstate telephone communications and the facilities of national securitie s
exchanges and markets .
III . PARTIES
23 . Lead Plaintiffs .
(a) Ontario Teachers . Co-Lead Plaintiff Ontario Teachers is a public pension
system organized for the benefit of current and retired teachers in Ontario, Canada . Ontari o
Teachers has approximately $53 billion in total assets under management . Ontario Teachers i s
responsible for the retirement income of approximately 154,000 elementary and secondar y
school teachers, 93,000 retired teachers and their survivors, and 91,000 former teachers wit h
entitlements in the plan. As reflected in the accompanying certification (Exhibit A), Ontari o
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Teachers purchased Biovail common stock during the Class Period in the NYSE and the Toronto
Stock Exchange .
(b) Local 282 Welfare Fund . Local 282 Welfare Fund is a multiemployer
employee benefit plan providing health and welfare benefits to participants . The Welfare Trust
Fund is established and maintained pursuant to the Agreement and Declaration of Trust as
amended and restated from time to time. Employer contributions are received by the Welfare
Trust Fund pursuant to written collective bargaining agreements between employers and Local
282, International Brotherhood of Teamsters . As of August 31, 2003, Local 282 Welfare Fund
was comprised of approximately $120 million in assets under management . Local 282 Welfare
Fund purchased Biovail common stock during the Class Period, as set forth in the accompanying
certification (Exhibit A) .
24 . Other Plaintiffs .
(a) The City of Dearborn Heights Act 345 Pension System purchased Biovail
common stock in the NYSE during the Class Period, as set forth in the accompanying
certification (Exhibit A) .
(b) William A. Emery is a Canadian resident and purchased Biovail common
stock in the Toronto Stock Exchange during the Class Period, as set forth in the accompanying
certification (Exhibit A) .
(c) Vera A. Hays, a resident of Pittsburgh, Pennsylvania, purchased Biovail
common stock in the NYSE during the Class Period in the transactions set forth in the
accompanying certification (Exhibit A) .
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(d) Robert Atkinson is a Canadian resident and purchased Biovail commo n
stock in the Toronto Stock Exchange during the Class Period in the transactions set forth in the
accompanying ce rt ification (Exhibit A) .
(e) S. D. Gokhale is a United States resident and purchased Biovail common
stock in the NYSE during the Class Period in the transactions set forth in the accompanyin g
certification (Exhibit A) .
(f) Mohammed Sobhan is a Canadian resident and purchased Biovail
common stock in the Toronto Stock Exchange during the Class Period in the transactions se t
forth in the accompanying certification (Exhibit A).
25 . Defendants .
(a) Biovail . Defendant Biovail is a corporation chartered in Ontario, Canada ,
with its registered principal address located at 7150 Mississauga Road, Mississauga, ON, Canad a
L5N 8M5. Throughout the Class Period, Biovail's common stock traded in efficient markets o n
the NYSE and the Toronto Stock Exchange .
(b) Eugene N . Mclnyk ("Mclnyk") . Defendant Mclnyk was , at all relevan t
times, Chairman and Chief Executive Officer of Biovail . On information and belief, Melnyk
maintains a residence in this district at 101 West 67`h Street, #44A, New York, New York 10023 .
Melnyk had direct involvement in the daily activities of the Company and participated in the
preparation and dissemination of the Company's communications to the public, including, bu t
not limited to, the Company's press releases and financial statements .
(c) Brian H. Crombie ("Crombie") . Defendant Crombie was, at all relevant
times, Chief Financial Officer and Senior Vice President of Riovail . Cromhie had direc t
involvement in the daily activities of the Company and participated in the preparation an d
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dissemination of the Company's communications to the public, including, but not limited to, the
Company's press releases and financial statements .
(d) John R . Miszuk ("Miszuk") . Defendant Miszuk was, at all relevant times,
Vice President, Controller and Assistant Secretary of Biovail . Miszuk had direct involvement in
the daily activities of the Company and participated in the preparation and dissemination of the
Company's communications to the public, including, but not limited to, the Company's press
releases and financial statements .
(e) Kenneth Howling ("Howling"). Defendant Howling was, at all relevant
times, Vice President of Finance of Biovail . Howling had direct involvement in the daily
activities of the Company and participated in the preparation and dissemination of the
Company's communications to the public, including, but not limited to, the Company's press
releases and financial statements .
26 . Defendants Melnyk, Crombie, Miszuk and Howling are collectively referred to
herein as the "Individual Defendants ." The Individual Defendants, because of their positions
with the Company, possessed the power and authority to control the contents of Biovail's
quarterly reports, press releases and presentations to securities analysts, money and portfolio
managers and institutional investors . Each defendant was provided with copies of the
Company's reports and press releases alleged herein to be misleading prior to or shortly after
their issuance and had the ability and opportunity to prevent their issuance or cause them to be
corrected .
27. Because of their positions and access to material non-public information, each of
the Individual Defendants knew that the material facts described herein had not been disclosed
and, in fact, were being concealed from the investing public, and that numerous of their own an d
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the Company's representations during the Class Period were materially false and'misleading a t
the time they were made . Pursuant to the "group-pleading" doctrine, each of the Individual
Defendants is liable for each of the Company's false statements made in the Company's pres s
releases and financial statements described below, for those statements constituted "group-
published" information and, thus, were the result of the collective actions of the Individua l
Defendants in connection with their direct involvement in the daily business of the Company .
IV. CLASS ACTION ALLEGATION S
28. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure on behalf of all persons who purchased Biovail publicly trade d
common stock (the "Class") during the period February 7, 2003, through and including, March 2 ,
2004 (the "Class Period") . Excluded from the Class are : Biovail ; Biovail's subsidiaries,
affiliates, predecessor and successor entities; Ernst & Young LLP and any of its affiliates,
subsidiaries, and predecessor and successor entities ; Ernst & Young LLP partners and partners o f
any of its affiliates, subsidiaries, and predecessor and successor entities ; the Individual
Defendants; members of the immediate families of the Individual Defendants ; any entity in
which any defendant has a controlling interest ; any person who was an officer or director o f
Biovail during the Class Period; and the legal representatives, heirs, successors or assigns of an y
of the foregoing excluded persons or entities .
29. The members of the Class are so numerous that joinder of all members i s
impracticable . The disposition of their claims in a class action will provide substantial benefit s
to the parties and the Court . During the Class Period, Biovail had more than 159 million shares
of stock outstanding, owned by hundreds if not thousands of persons .
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30 . There is a well-defined community of interest in the questions of law and fac t
involved in this case . Questions of law and fact common to the members of the Class, whic h
predominate over questions which may affect individual Class members, include :
• Whether Defendants violated the 1934 Act ;
Whether Defendants omitted and/or misrepresented material facts ;
• Whether Defendants' statements omitted material facts necessary to make thestatements made, in light of the circumstances under which they were made,
not misleading;
• Whether Defendants knew or deliberately disregarded that their statementswere false and misleading; '
• Whether the prices of Biovail's publicly traded securities were artificially
inflated ; and
• The extent of damages sustained by Class members and the appropriate
measure of damages .
31 . Lead Plaintiffs' claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants' wrongful conduct in violation of
federal law that is complained of herein .
32 . Lead Plaintiffs will adequately protect the interests of the members of the Clas s
and have retained counsel competent and experienced in class action securities litigation . Court-
appointed Lead Plaintiffs have no interests which may conflict with other members of the Class .
33 . A class action is superior to other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable .
V. SUBSTANTIVE ALLEGATION S
A. Background of the Compan y
34. Biovail is a pharmaceutical company engaged in the development, manufacture ,
marketing, licensing, and distribution of pharmaceutical products for the treatment of chroni c
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medical conditions. The Company's sales and operations facilities are primarily located in the
United States . Of the Company's four manufacturing plants, three are located in the United
States in Chantilly, Virginia; Dorado, Puerto Rico ; and Carolina, Puerto Rico . The fourth is
located in Canada in Steinbach, Manitoba. In 2003, Biovail generated $548 million in revenues
from product sales in the United States out of total product sales of $632 million, or 87% .
Biovail's principal sales office, with more than 130 employees, is located in Bridgewater, New
Jersey .
35 . The Company's products are focused on cardiovascular disease, central nervous
system disorders, and pain management . A key element of Biovail's business strategy is the
application of the Company's advanced, proprietary delivery technology to drugs originally
developed by other pharmaceutical companies . Basically, Biovail reformulates existing drugs to
make them easier to administer to patients . For example, Biovail may reformulate a drug that
needs to be taken four times a day so that it can be taken in a single daily dose. Biovail's
delivery technology platforms include : (a) controlled-release technologies, (b) FlashDose(R)
36. A prominent example of Biovail's use of its drug delivery technology to develop
new products is Cardizem LA. Cardizem is the brand name for a class of drugs known
generically as diltiazem, which is available from a number of generic manufacturers . Biovail
also makes a generic version of Cardizem . The Cardizem family of products has provided
leading medications for the treatment of hypertension in the calcium channel blocker category of
cardiovascular drugs for more than 20 years . One of the leading Cardizem products is Cardizem
CD .
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37. On February 7, 2003, the FDA approved a new, patented formulation o f
Cardizem, called Cardizem LA. This new formulation was a graded extended-release
formulation providing 24-hour blood pressure control with a single, daily dose .
38 . Biovail also applied its drug delivery technology to a drug marketed under the
brand name Wellbutrin . Wellbutrin was introduced originally in July 1989 by GlaxoSmiLhKline
("GSK") for the treatment of depression. This original version was an immediate release
formulation that had to be administered four-times a day. In 1996, GSK launched a twice-daily
controlled-release formulation, named Wellbutrin SR . In 2003, Biovail, in partnership with
GSK, produced a once-daily formulation, Wellbutrin XL. By late 2002, Cardizem LA and
Wellbutrin XL were recognized as Biovail's future "flagship" products, which would drive the
Company's revenue growth throughout 2003 . Indeed, by January 2003, the valuation of the
Company's stock was principally based on the prospects for these two drugs .
B. Biovail 's Prospects and Stock Price in 2003 Depended on the Successful Launch ofCardizem LA and Wellbutrin XL
39. From the outset of the Class Period, Biovail faced strong pressure from the
investment community to continue its stellar earnings and revenue growth . In 2002, Biovail's
revenues and diluted earnings per share had grown 30% compared to 2001 . Biovail and Wall
Street analysts expected the trend to continue in 2003 through the successful launch of Cardizem
LA and Wellbutrin XL . Analysts had been expecting Biovail to launch these two drugs since the
fall of 2002, and were keenly focused on the drugs' revenue potential . For example, on
September 19, 2002, an analyst from Credit Suisse First Boston, Kenneth Kulju, published a
report that highlighted the importance of Cardizem LA and Wellbutrin XL : "[t]wo upcoming
major new products launches remain critical in enhancing Biovail's earnings growth visibility,
including the anticipated fourth quarter approval of Cardizem XL [subsequently renamed "LA" ]
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(hypertension) followed by the planned second half 2003 introduction of a new once-daily form
of Wellbutrin XR [subsequently renamed "XL"] through GlaxoSmithKline ." (Emphasis
supplied) . At the time, Biovail's stock price was approximately $25 per share .
40. Other Wall Street analysts echoed Kulju 's valuation approach to Biovail ,
emphasizing the launch of Cardizem LA and Wellbutrin XL. According to a December 3, 2002
report by J .P. Morgan's well-renowned pharmaceutical analyst, Corey Davis, a successful launch
of Cardizem LA was "crucial" to Biovail's stock price .
We feel that a successful Cardizem [LA] launch is crucial for Biovail to
achieve more of a[n earnings] multiple expansion, since early script datawill provide convincing evidence to the Street that [earnings per share o flS2.30 in 2003 is achievable. For this reason, we think the stock will notsee a major move until January, after the Rx data starts, to roll in[assuming a December 2002 FDA approval] . . . . If it becomes apparentthat our estimate of $140M in Cardizem [LA] revenue in 2003 is
achievable, we believe it would not be unreasonable to see the BVFmultiple expand from its current 15x up towards 25x -- still well below ourprojected 32% organic growth rate. This would translate to around a $58stock and about a 70% return for the current $34 .
'41 . In sum, Biovail had stressed to the market that the launch of Cardizem LA was
critical to Biovail's 2003 projections and analysts were therefore focused on its success . As
Corey Davis had concluded in his December 3, 2002 report, "IF the Cardizem [LA] launch goes
smoothly and the Street becomes convinced that the 30%+ growth rate in 2003 is achievable, we
find that a 25x multiple is very reasonable - translating to around a $58 stock." (capital letters in
original) .
42. The FDA did not approve Cardizem LA until February 7, 2003, instead of in th e
fourth quarter of 2002, as expected by Davis and other Wall Street analysts . Biovail's stock
price suffered as a result, dropping from approximately $35 per share in the first days o f
December to $25 per share by the end of the month . This delay made the subsequent February 7
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press releases and April 2, 2003 launch of Cardizem LA even more important to the market s
valuation of Rinvail for 2003 .
C. Biovail 's February 7, 2003 Guidance and the FDA Approval of Cardizem L A
43 . On February 7, 2003, the first day of the Class Period, Biovail issued two pres s
releases . In one, Biovail announced that the FDA had approved Cardizem LA and that the
commercial launch of the product was scheduled for April 2, 2003 .
44. The press release, which listed Defendant Howling as a contact, stated as follows :
FDA Approves t3iovail'5 Cardizem LA for Hypertension
Cardizem(R) LA "graded release" provides 24-hour blood pressure control
Convenience and flexibility of once-daily dosin g
Clinical trials indicate safety and tolerability even at higher doses
Conference call scheduled for 11 :30 a .m . E .S .T .
Biovail Corporation (NYSE :BVF)(TSX :BVF) announced today that the U .S . Food andDrug Administration (FDA) has approved Cardizem(R) LA, a new graded extended-
release formulation of diltiazem HCi for the treatment of high blood pressure orhypertension . Cardizem(R) LA -- long acting -- provides 24-hour blood pressure
control with a single daily dose and a flexible dosing range from 120mg to 540mg .Cardizam(R) I A iG the only product laheleri to allow administration in either tha
morning or the evening . With evening administration and the unique graded release
technology, clinical trials have shown increased reduction in blood pressure in theearly morning hours, which is when patients may be at greatest risk of significantcardiac events .
"Cardizem(R) LA is the first New Drug Application (NDA) product that Biovail willlaunch directly to physicians using our own fully-integrated sales force in the UnitedStates," stated Eugene Melnyk, Gnairman and CEO of Blovall . °Tne Introduction ofCardizem(R) LA offers physicians a once daily formulation of the compound diltiazem,
a drug that is well-regarded for its safety profile and one with a brand name thatphysicians have come to know and trust . "
Hypertensio n
Clinical studies indicate that morning or evening dosing of Cardlzem(R) LA provides
effective 24-hour blood pressure control .
"llncnntrnlled hyportensinn plays a -i0nifirant rnla in thn rtnntho of hiincirnrbs of
thousands of heart-disease patients in the U .S . each year,(1)" said Joel Neutel, MD,assistant clinical professor, University of California at Irvine . "With the approval of
Cardizem(R) LA, we now have a proven therapy that provides effective and safe 24-hour blood pressure control with potential added benefits for patients with specifichypertensive risks ."
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Approximately 50 million American adults -- or one in four -- have high bloodpressure, and 25 percent of these are not adequately treated . Uncontrolledhypertension kills 430,000 Americans each year and contributes to the deaths of210,000 others .
Clinical Studies
In two randomized, placebo-controlled clinical trials, Cardizem(R) LA demonstrateddose-related mean reductions in trough diastolic blood pressure (DBP) followingevening administration of 120mg, 240mg, 360mg and 540mg doses when comparedto placebo. Reductions ranged from -2 .0 millimeters of mercury (mm/Hp) with the120mg dose to -8 .1mm/Hg with the 540mg dose . A similar range of morning dosesshowed a linear decrease in DBP from -1 .9mm Hg with a 120mg dose to -8 .6mm/Hgwith 540mg. All doses above 120mg maintained their anti-hypertensive effect for acomplete 24-hour period. Side effects at dosages up to 540mg were similar toplacebo .
"The data demonstrate that Cardizem(R) LA delivers 24-hour blood pressure controlwhether dosed in the morning or the evening," said Stephen Glasser, MD, professorof epidemiology at the University of Minnesota, School of Public Health . "We continueto explore the clinical significance of the blood pressure effect of evening Cardizem(R)LA administration and have seen favorable clinical trial results in the treatment ofangina ."
The most commonly reported side effects with Cardizem(R) LA were headache,edema and upper respiratory tract infection . Side effect incidence was similar toplacebo .
Cardizem(R) LA should not be used by patients who have abnormal heart rhythmsdue to sick sinus syndrome or very slow heartbeats as a result of second- or third-degree AV block, except in the presence of a functioning ventricular pacemaker.Patients should also avoid Cardizem(R) LA if they have hypotension (less than90mm/Hg systolic blood pressure), hypersensitivity to diltiazem or acute myocardialinfarction and pulmonary congestion confirmed by x-ray.
Cardizem(R) LA will be launched in doses of 120mg, 180mg, 240mg, 300mg, 360mgand 420mg . Dosing up to 540mg has been approved by the FDA and Biovail currentlyhas a single dose 540mg product under development.
Other Clinical Studie s
In October of 2002, Biovail released the positive results from a Phase III clinical trialfocused on the use of Cardizem(R) LA in chronic stable angina pectoris . This studyillustrated that significantly greater efficacy is demonstrated in the morning time periodwhen dosed in the evening and that evening dosing demonstrates efficacy 24 hoursafter dosing in patients with chronic stable angina . Biovail intends to file an NDA forthe treatment of angina with the FDA based on the results of this study .
Three Cardizem(R) LA Phase IV clinical studies have been initiated comparingCardizem(R) LA to ramipril and to amlodipine. One of these studies involves AfricanAmerican patients with hypertension . A second study involves diabetic patients withproteinuria . Both of these trials are progressing on schedule . A third study, which wascompleted in October of 2002, evaluated the safety and efficacy of Cardizem(R) LAdosed at night compared to the ACE-inhibitor ramipril also dosed at night in patientswith stage-one and stage-two central hypertension . Results of this study showed that,versus ramiprii, Cardizem(R) LA not only provided better blood pressure controlduring the critical morning hours but better blood pressure control over a full 24 hours .
Biovail expects to launch Cardizem(R) LA commercially on April 2, 2003 .
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"Safe Harbor" statement under the Private Securities Litigation Reform Act of 199 5
To the extent any statements made in this release contain information that is nothistorical, these statements are essentially forward looking and are subject to risksand uncertainties, including the difficulty of predicting FDA approvals, acceptance anddemand for new pharmaceutical products, the impact of competitive products andpricing, new product development and launch, reliance on key strategic alliances,availability of raw materials, the regulatory environment, fluctuations in operatingresults and other risks detailed from time to time in the company's filings with theSecurities and Exchange Commission . (Citation omitted) .
45 . Also on February 7, 2003, Biovail issued another press release containing its
financial guidance for 2003 (the "February 7 Press Release") and also listing Howling as a
contact . The announcement reiterated the impending release of Cardizem LA and promised 30%
growth in revenues and diluted earnings for the year. In 2002, Biovail had generated revenues of
$788 million and diluted earnings per share of $0 .55 under GAAP ($1 .78 per share, excluding
one time charges) .
46. The press release provided investors and Wall Street analysts with specifi c
revenue projections by product category. For example, Biovail specifically projected that sale s
of Wellbutrin XL would be between $75 and $150 million . Similarly, the Company projecte d
revenues of $170 to $200 million from "controlled-release gene rics," and that sales in the United
States of branded and generic Tiazac (for the treatment of hypertension) would be between $5 0
and $70 million .
47. Biovail did not provide specific revenue projections with respect to Cardizem LA .
Instead, it lumped Cardizem LA together with the older versions of Cardizem, Cardizem CD an d
Cardizem SR. Combined, Biovail projected that these three products would generate $140 t o
$200 million in revenues from sales in the United States .
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48 . The press release stated, in its entirety, as follows :
Diluted earnings per share expected to grow by 30 %
Biovail 's 2003 product launch expectations include Cardizem(R) LA,Wellbutrin(R) XL, Teveten(R) HCT and Zovirax(R) Crea m
Biovail Corporation (NYSE :BVF) (TSX:BVF) announced today its revenue andearnings guidance for 2003. The financial guidance presented today continues toreflect the Company's considerable opportunities for growth and its ability to capitalizeon its drug delivery technological asset base and its rich pipeline .
Biovail'c annua l product sales revenue by major category , rosoarch and developmentrevenue, royalty and co-promote revenue and total revenue for 2003 is expected togrow approximately 30% and be within the following annual ranges :
Numerous factors may impact the Company's quarterly results including the timing ofvarious product launches and the associated launch costs , the potential erosion ofrevenues related to branded products due to competitive or generic activity and in thecase of Tiazac( R), the potentia l that this product may be genericised at some point in2003 . Quarterly product revenue will likely increase throughout the year on a quarterover quarter basis due to these factors and are expected to be within the followingranges :
Gross margins are forecast to be higher in 2003 than in 2002 and are expected to bein the range of 76% to 78% of product sales revenue . Research and developmentspending is forecast to be in the range of 375 million to $90 million reflecting anexpected increase in clinical activity . Selling, general and administrative expenses areexpected to be in the range of 20% to 23% (excluding amortization expense) of tota l
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revenue for the year . Selling, general and administrative expenses are expected to besignificantly higher in the first two quarters of 2003 due to the launch of severalproducts and are expected to be lower, in percentage terms, during the second half of2003 .
Amortization expense for 2003 will vary depending on the values assigned to certainassets the Company acquired at the end of 2002 . Consistent with prior years, theCompany's tax rate is expected to remain in the 7% to 8% range .
Fully diluted earnings per share are expected to increase by 30% or more in 2003versus 2002 and be in the range of $2 .25 and $2 .35 . Fully diluted earnings per sharein 2004 are also expected to grow in excess of 30% based on continued success ofanticipated product launches and a favorable competitive market environment . On aquarterly basis, 2003 year over year growth will likely be lower than 30% for the firsttwo quarters versus the prior year's applicable quarterly results due to the timing ofexpenses associated with launching several products . Fully diluted earnings per sharecould be significantly higher than 30% during 03 and Q4 of 2003 depending onnumerous factors including the timing and success of product launches, a higher levelof first half 2003 spending associated with the launch costs for these products anddue to the anticipated launch of Wellbutrin(R) XL in the second half of 2003 . TheCompany will not be incurring launch expenses associated with the commercializationof Wellbutrin(R) XL in the United States as our marketing partner will be bearing theseexpenses .
Quarterly fully diluted 2003 earnings per share guidance by quarter is as follows :
For further information, please contact Ken Howling at 905/286-3000 or send inquiriesto it@biovail .com .
Biovail Corporation is an international full-service pharmaceutical company, engagedin the formulation, clinical testing, registration, manufacture, sale and promotion ofpharmaceutical products utilizing advanced drug delivery technologies . Moreinformation on Biovail Corporation can be found on http ://www .biovail .com .
"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995 .To the extent any statements made in this release contain information that is nothistorical, these statements are essentially forward looking and are subject to risksand uncertainties, including the difficulty of predicting FDA approvals, acceptance anddemand for new pharmaceutical products, the impact of competitive products andpricing, new product development and launch, reliance on key strategic alliances,availability of raw materials, the regulatory environment, fluctuations in operatingresults and other risks detailed from time to time in the company's filings with theSecurities and Exchange Commission .
--30--EL/sf' DJL/c l
CONTACT : Biovail Corporatio nKenneth G . Howling, 905/286-3000
(Emphasis supplied) .
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49 . Both press releases issued on February 7, 2003 were prepared and disseminated
with the participation of the Individual Defendants and constituted the collective work of the
Individual Defendants in light of their direct involvement in the daily business of the Company .
50. On February 7, 2003, Biovail also held a conference call with analysts, in which
Melnyk, Crombie and Howling participated . During this call, Howling repeated the projections
set forth in Biovail's press release and emphasized that with the approval of Cardizem LA an d
the upcoming approval of Wellbutrin XL, the Company expected "total revenues to be in the
range of $950 million to $1 .5 billion," with total product sales in the range of $845 to $930
million, and earnings per share growth of 30% compared to 2002 . Melnyk emphasized the
benefits of Cardizem LA and told analysts that "the total sales force number behind the launch o f
this product [is] approximately 800 representatives, who would be promoting Cardizem LA in
the first position during 2003 . "
51 . Subsequent to the issuance of the two press releases and the conference call, on
that same day, J .P. Morgan analyst Corey Davis issued a research report, which stated as
follows: "[w]e never thought that approval was in jeopardy, but it comes as a huge relief to the
market, as uncertainty over the past several wks [sic] has been the major factor holding back the
stock." He further added that "[t]his watershed event marks BVF's official transition into a fully
integrated specialty pharma company, and exactly what we believe the market was looking for to
improve the psychology of the stock ." Davis also revised his Cardizem LA revenue estimate s
for 2003 to $80 million, from approximately $120-5140 million, in light of the delayed launch,
which was then scheduled for April 2, 2003 . Davis also highlighted again the overwhelming
importance of the Cardizem LA launch for the value of Biovail stock in a February 27, 2003
report : "Since we think most investors are focused on the launch of Cardizem LA in April, w e
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don't think Biovail's 4Q'02 [earnings' announcement] will move the stock much' unless there is
some shocking news." Davis continued :
Most of the Street's attention right now is focused on the Cardizem
LA launch with Glaxo's approval for Wellbutrin XL right behindit . Our current thinking is that you own this stock for the
psychological boost that will be provided by the LA launch (thecompany has finally proven it can self-market its own internallyderived new drugs) and for the tremendous profitability that
Wellbutrin XL will afford (with 30% of GSK sales going to BVF,a 5% COGS, and a 7% tax rate, 23% of GSK sales drop straight toBiovail's net income line) . At $36.27 and using $2 .30 for 2003EPS, BVF is trading at 16x - only i/2 of its'03 growth rate of 32% .If the multiple expands to our specialty pharma group average of19%, it would be around a $44 stock . We see it attaining this level
in the next month or so . Over the next 12 months, if the marketapplies this same multiple to 2004 EPS of $2 .98, it would translateto roughly a $57 level (a potential 57% return) . (emphasissupplied) .
52. Salomon Smith Barney's specialty pharmaceuticals analyst Angela Larso n
("Larson"), also based her valuation of Biovail on the launch of Cardizern LA . In a February 7,
2003 report she said : "Cardizem LA is an essentialpart of our Biovail investment thesis as it is
their first self-developed, self-launched product, pushing them into the Specialty
Pharmaceutical business model front a historical drug delivery business model. " (emphasis in
original) . She also set the parameters by which Cardizem LA sales would be measured : "Biovail
expects to launch Cardizem LA in early April and we plan to measure Biovail's marketing
capability vs . the historical launch of Tiazac, that we believe is a good stick by which to measure
Biovail's marketing capabilities ." As set forth below, Biovail subsequently touted Cardizem LA
by comparing the number of prescriptions written for LA with Tiazac .
53 . Larson issued a subsequent research report on March 24, 2003, again hinging her
valuation of Biovail on Cardizem LA . The report was entitled "BVF : Valuation to be Driven by
Cardizem LA," and stated as follows :
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Cardizem LA has long held our attention as we view it as the keyproduct launch which, if successful, can land Biovail squarely intothe "Specialty Pharmaceutical" sector from prior peer comparisonsto drug delivery (primarily royalty driven revenues) and generics(commodity Rx market) . . . . We expect stock price volatility untilthe launch trend is established; given the April 2 launch, RX datamay not establish a clear trend until early-mid June .
[T]he Street perceptions of Biovail will continue to evolve from alower multiple drug distribution company to a higher multiplespecialty pharmaceuticals company. Moreover, if Cardizem LAcan be as successful as our model suggests, and given that weexpect a second new product launch in 2H03 [second half of 2003]- Wellbutrin once-daily with GlaxoSmithKline - then we estimate
that the company can sustain revenue and earnings growth rates ofat least 30% for several years, which in turn could allow BVFshares to trade at a 20% to 40% premium to the specialtypharmaceutical average multiple (currently 2004 sector p/e is 15x) .
Historically in pharmaceuticals , we've observed a three wavetrading pattern around products . . . . For Biovail, we believe thepattern has followed the development of Cardizem LA . . . . Thenext wave is dependent on how well the company does inmarketing the product. This is the wave we believe Biovail nowfaces. Concerns in this wave are most likely to focus on marketingmuscle, market share gains of the product and stock valuation . . . .The most significant risk is Biovail ' s perceived lack of marketinghistory. We view Biovail as having a good marketing track record,albeit not a long one . . . . Importantly, we view Cardizem LA ascritically impo rtant to Biovail, but not to the total and largehypertension market . ( emphasis in o riginal) .
54. Based on the Company's projections for Cardizem and Wellbutrin XL, Biovail' s
stock price surged . From February 6 through February 28, the stock price appreciated 30%, from
approximately $28.50 to $37.20 per share . By early June 2003, Biovail's stock price ha d
reached its Class Period high of over $50 per share .
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D. Undisclosed Adverse Facts Affecting Biovail' s Busines s
1 . Biovail's Projections for the Cardizem Family of Products Were KnowinglyFalse
55 . As of February 7, 2003, Defendants had actual knowledge that the revenues and
earnings projections Biovail announced were unattainable and unreasonable, especially the
projection of S140 to $200 million for the Cardizem Family of Products . As set forth below,
former employees have stated that Melnyk and the Finance Department set sales targets based on
the dollar figures needed to achieve Wall Street's earning expectations, without considering
whether these sales targets were realistic . The Finance Department would then impose those
targets on Biuvail's iiiaiketiug direelurs .
56. Confidential Witness 1 was a product manager for Biovail from 2000 throug h
October 2003, and worked as a product manager for Cardizem products (CD, SR, and LA) from
October 2001 through his departure . Witness 1 was responsible for ensuring that Biovail's drugs
smoothly made their way from the manufacturing plant to the wholesalers . He thus had to
ensure that sufficient quantities of the drug were made available to wholesalers, a process that
involved assessing the likely future demand for drugs and Biovail's manufacturing capacity . As
a product manager, he worked directly under Harold "Tim" Slone ("Slone"), a Biovail director of
marketing, who reported directly to Biovail's Vice President of Marketing, Ken McBain
("McBain") . Witness 1 was also in regular contact with Biovail's manufacturing team in
Steinbach, Manitoba, which included Larry Thiesen . Witness 1, Slone and McBain therefor e
were key members of the Cardizem LA team and had first hand knowledge of the potential sales
of Cardizem LA.
57. Despite their deep understanding of the market for Cardizem LA and the othe r
drugs they managed, on a monthly or quarterly basis, Witness 1, Slone and McBain would ge t
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revenue targets from Biovail's Finance department, specifically from Defendants Crombie and
Miszuk . Witness 1 explained that Finance did not have a sense of product demand in terms of
volume, however, and simply instructed that certain revenue targets be met . With respect to
Cardizem LA, those targets were unreasonable .
58. Witness 1 further indicated that, he, Slone and McBain had considered all aspects
of the market and concluded that $50 million in sales of Cardizem LA was reasonable for th e
first year . They then presented their figures to Defendants Melnyk, Miszuk and Crombie, as well
as Rolf Reininghaus ("Reininghaus"), a Director of the Company and Senior Vice President of
Corporate and Strategic Development . McKinsey & Co. ("McKinsey"), which had been retained
by Biovail to assist with the Cardizem LA launch, projected $35 million . Nevertheless, Melnyk,
Miszuk and Crombie decided that Biovail would publicly project sales of Cardizem LA for 2003
of 590-$100 million . Ultimately, sales for 2003 were $47 .7, million, as predicted by Witness 1,
Slone, and McBain.
59 . Witness 1 said that he, Slone and McBain openly protested the $90-$ 100 million
number in meetings with Melnyk, Miszuk and Crombic, and told them that these projection s
were completely unrealistic . Indeed, Troy Hampton ("Hampton"), another Biovail employee
who worked with Witness 1 on the projections of Cardizem LA sales, described the $90-$100
million projection as "obscene" and "beyond what we could in any realistic terms do ." Witness
1 stated that the word "outlandish" was also used in conversations and brainstorming meetings .
60. Biovail's method of issuing unreasonable projections did not stop with Cardizem
LA. The product manager for Teveten, Josh Franklin ("Franklin"), experienced the same type of
top-down pressure to adopt "outlandish" projections as Witness 1 . According to Confidential
Witness 2, a former sales district manager in Houston with a sales team of ten people throughou t
-27-
2003, Franklin, Slone and Linda Secola (a Biovail product manager) attended meetings with
Melnyk and McKinsey where Melnyk would distribute the sales plan for the upcoming year with
specific sales targets. Witness 2 was responsible for marketing Biovail's drugs directly to
physicians in order to persuade them to prescribe the products to their patients . Witness 2
reported to Franklin, and stated that Franklin told Witness 2 that McKinsey and Melnyk set sales
targets by first making financial projections to shareholders, and then instructing the sales force
to meet whatever targets were necessary to meet the financial projections .
61 . For Teveten, the plans required that sales quadruple in 2003, from $11 .7 million
to approximately $47 million. This was impossible, according to Witness 2, because Teveten
was a poor seller . There were several competing products on the market and Teveten had been
the eighth drug to enter the same product class . The competing products were manufactured and
distributed by blue chip pharmaceutical companies, such as Bristol-Myers, Astra Zeneca,
Novartis, and Merck. According to Witness 2, when a product is the eighth in a market occupied
by such big names, sales could not possibly quadruple . It was simply impossible . In the end,
Witness 2 was correct . Teveten sales in 2003 did not quadruple and only increased to $22 .2
million .
2. Biovail was Unable to Manufacture Sufficient Quantities of Cardizem LA toSupport a Successful Launc h
62. Several former Biovail employees, including Witness 2, 3 and 5 (described
below), have confirmed that the Cardizem LA launch was marred by manufacturing problems
that resulted in severe product shortages .
63 . Confidential Witness 3 was an account manager and vice-president of Biovail
from October 2000 until October 2003 . As account manager, Witness 3 was sales director for
the Northeast region and subsequently promoted to vice-president and charged with building the
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sales force for the Cardizem LA launch . Witness 3 reported directly to Jim Petrillo ("Petrillo"),
Vice President and General Manager of Biovail's U .S. Operations . Petrillo reported to William
Poole ("Poole"), then President of Biovail North American Pharmaceuticals .
64. Witness 3 attended a Cardizem LA launch meeting conducted by Biovail for th e
entire sales force in Orlando, Florida, on or about March 15, 2003 . Rcininghaus directed the
meeting and was in charge of the launch. To assist him, Biovail had also hired McKinsey to
provide consulting services . Marla Kessler and Chris Simon, both Principals at McKinsey's
New York office, provided substantial advice to Biovail, and, in particular, Reininghaus .
65. Witness 3 stated that, just days before the March 15 launch meeting, there was a n
emergency meeting with Reininghaus, McKinsey and Petrillo, where everybody was in a state of
panic because they said nobody was to breathe a word that there was a manufacturing problem .
The Company simply did not have enough product availahle because it was not able to
manufacture sufficient quantities of Cardizem LA . Reininghaus and Petrillo told Witness 3 and
other managers that this information was to be kept in the strictest confidence, so as not to alarm
the investing public. Indeed, senior managers were not even supposed to inform sales
representatives of the problems .
66. Several other former employees of Biovail confirmed Witness 3's account .
According to Witness 2, in March 2003, he and other district managers were pulled aside by
Matt Heck ("Matt Heck," Biovail's Vice President of Sales), Mike Goolsby ("Goolsby,"
Biovail's Director of Sales) and perhaps Slone, all three of whom reported to Poole . These three
men told the district managers that the Company did not have enough Cardizem LA to sell .
Witness 2 said that Cardi7.em T .A was supposed to be the big product but that when he went to
the launch meeting in March 2003, the district managers were told that the Company was going
-29-
to have to do a limited product launch because manufacturing could not make the product . Matt
Heck, Goolsby and Slone told the managers that there was no retail stocking and very limited
supply, and that the only way to handle the problem was to have all prescriptions faxed to a
single location to distribute the product (resulting in the PLACE program, described further
below) .
67. Confidential Witness 5, also confirmed Witness 3's and Witness 2's account o f
the facts . Witness 5 was a district manager in the Midwest from 2002 through April 2004 and
explained that prior to the launch of Cardizem LA, district managers were warned that the drug
launch would proceed even though "we just don't have any to send out . They had a shortage of
the retail amount that was necessary ." When the district managers asked why the launch was
proceeding, they were instructed to "manage through it ." Also according to Witness 5, Biovail
doubled the sales force to sell upcoming products . But what confused him, and the rest of the
sales force, was that there just wasn't enough drug for the sales force to sell . "It was ludicrous,"
he said.
68. The manufacturing problems were also no resolved subsequent to the launch ,
according to these employees . Witness 2 indicated that the lack of product continued to
adversely affect sales throughout 2003, and once Wellbutrin XL was launched in the third
quarter of 2003, the situation got worse because Wellbutrin XL had manufacturing priority over
Cardizem LA. There were "constant stock-outs" of Cardizem LA, according to Witness 2 .
Although he was told that Cardizem LA was supposed to be a key product for the Company,
Biovail had been "lying" all along about the manufacturing capabilities because Wellbutrin XL
had manufacturing priority over Cardiz.em LA_ "Rut they knew all along that manufacturin g
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could not keep up with the demand for that product," referring to Cardizem LA. As a result,
according to Witness 2, week after week Cardizem LA was out of stock .
69. Witness 1 also confirmed that Biovail was never able to manufacture enough
Cardizem LA because Wellbutrin XL was given priority . Witness 1 explained that batches of
Cardizem LA frequently failed basic quality- control tests, and when he called the manufacturing
personnel to discuss the problems, including Thiesen, they would tell him that they were unable
to spare the time to improve Cardizem LA quality because they were focused on manufacturing
Wellbutrin XL .
70. That there were severe problems in manufacturing Cardizem LA is also
confirmed by the delay in the launch of Cardizem LA, as compared to the launch of Wellbutrin
XL. Biovail first received from the FDA an Approvable Letter for Cardizem LA on June 17,
2002. The Approvable Letter, as reported by Biovail, stated that the FDA had reviewed the
application and that Cardizem LA was approvable, subject to the completion of labeling matters
and the submission and review of certain information . The FDA, however, did not give final
approval until February 7, 2003 and, tellingly, Biovail did not book a single dollar in revenue
from Cardizem LA until the next quarter, beginning in April 2003, or two months after final
approval . Biovail was then unable to completely stock its channel until the end of the second
quarter ended June 30, 2003, a full year after the FDA issued its Approvable Letter .
71 . By way of comparison, Biovail's launch of Wellbutrin XL was markedly differen t
and radically faster . The FDA issued its Approvable Letter for Wellbutrin XL on June 26, 2003 .
That same quarter, which ended just four days after the Approvable Letter was issued, Biovail
sold $8 .1 million dollars of Wellbutrin XL to begin stocking the channel . The FDA approved
Wellbutrin XL on August 28, 2003 . Biovail then launched the product that same quarter and
-31-
booked another $8 .2 million in revenues . Thus, Biovail had already generated $16 .3 million in
revenues from Wellbutrin XL by the end of the same quarter in which Wellbutrin XL had been
approved.
72. Witness 2 also stated that the delay between the Cardizem LA Approvable Lette r
and the product launch was unusual in the industry and due to the Company's inability t o
manufacture sufficient quantities of the drug . Witness 2, who has worked in the pharmaceutical
industry for 30 years, stated that a product launch typically occurs six to eight weeks after an
approvable letter is received .
73. Biovail tacitly acknowledged that manufacturing problems plagued the launch o f
Cardizem LA in its post-Class Period filing with the SEC of its 2003 20-F on May 14, 2004 .
Tellingly, Biovail's new 20-F included a brand new section that had not appeared in its earlier
20-Fs. Every year, Biovail filed its annual financial statements on Forrn 20-F discussing the
results of the prior year, and included a statement of "risk factors" that could affect Biovail's
business . However, after the disastrous Cardizem LA launch, marred by Biovail's crippling
inability to manufacture the drug in sufficient quantities, Biovail's new 20-F for the first tim e
included an extensive discussion of the difficulties Biovail might encounter in its efforts t o
manufacture its products . Specifically, the new 20-F stated :
Our business could suffer as a result of manufacturing issues .
The continued increase in the number of products we market and
have pending at the FDA and TPD requires us to continue to expand ourmanufacturing capabilities, including making changes to ourmanufacturing facilities in Puerto Rico and Steinbach, Manitoba, Thetimely completion of these efforts is necessary for us to have sufficientmanufacturing capacity for the anticipated quantities of our existingproducts and the products we expect to market or out-license in thefuture, and will require significant levels of capital investment . Ourinability to complete our expansion and conversion projects, oradequately equip the facilities in a timely manner, or delays in receivingFDA and TPD approval could adversely affect our results of operations,financial condition and cash flows .
32-
Our manufacturing and other processes utilize sophisticatedequipment, which sometimes requires a significant amount of time toobtain and install . Although we endeavor to properly maintain ourequipment and have key spare parts on hand, our business could sufferif certain manufacturing or other equipment, or a portion of, our facilitieswere to become inoperable for period of time . This could occur forvarious reasons, including catastrophic events such as hurricane orexplosion, but also equipment failures and/or delays in obtainingcomponents or replacements thereof, as well as equipment issues,construction delays or defects and other events, both within and outsideof our control .
We have at times operated some of our manufacturing facilities ona 24-hour a day, 7-day a week production cycle in order to meet the
market demand for current and anticipated products . Operating on thatbasis and meeting the anticipated market demand requires minimalequipment failures and product rejections . However, because wemanufacture products that employ a variety of technology platforms,,some of our manufacturing capabilities may at times be over-utilized,while others may be under-utilized, resulting in inefficiencies, equipmentfailures and rejection of lots . Until our manufacturing processes areoptimized, and our manufacturing facilities are expanded, we mayhave difficulty at times fulfilling all of the market demand for ourexisting and future products , which could adversely affect ourresults of operations, financial condition and cash flows . A portion ofour pharmaceutical manufacturing capacity as well as other criticalbusiness functions are located in areas subject to hurricane andearthquake casualty risks . Although we have certain limited protectionafforded by insurance, our business and our earnings could be materiallyadversely affected in the event of a major windstorm or earthquake ,
Our manufacturing facilities are located outside the continentalU.S . while most of our sales are within the U .S. Border controls mayhave an impact on our ease of access to the U .S. market place .(Emphasis supplied) .
74. The timing of Biovail's new, prominent risk warning, added only after the end of
the Class Period, further supports the accounts of former employees that Biovail had experience d
overwhelming difficulties in manufacturing Cardizem LA from the start of the Class Period .
Rinvail Implemented the PLACE Program to Deceive Investors
75 . According to Witness 3, because Biovail did not have sufficient product,
Defendants created a two-phase launch program . Phase one would involve a purportedly clinical
experience program called PLACE . Phase two would consist of a more typical pharmaceutical
product release in which the product would be stocked in retail pharmacies and wholesal e
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distributors - i .e ., the channel . This two-step strategy, however, was a debacle, and the
Company's sales of Cardizem LA to patients never materialized . Nevertheless, as detailed
below, the Company concealed this fact from investors and misled them into believing that the
launch of Cardizem LA had been a glowing success .
76. Under the PLACE program, doctors received $1,000 to $1,500 if they wrote 10 to
15 prescriptions, which patients could fill at no charge through a special mail order pharmacy .
Biovail then asked doctors to fill out some rudimentary information about the patients that had to
be mailed to Biovail, thereby supposedly justifying the "clinical" aspect of the program .
77. But the clinical aspect of PLACE was just a cover to legitimize the pay-for-
prescription arrangement, and the "clinical" data generated was worthless, as Biovail well knew .
According to a July 21, 2003 article in The Wall Street Journal entitled, "Biovail Is Paying
Physicians Prescribing New Heart Drug," participating doctors dismissed the idea that Biovail
could use the data they provided for scientific papers or trials . The Journal quoted George
Massing, a cardiologist in Mobile, Alabama, who had received $250 at the time and expected to
receive an additional $750, as saying, "[t]hey can call it a study, but there's no science with it
whatsoever . . . . It's worthless data . It takes less than five minutes for each patient, and an extra
few minutes to explain to the patient that I want you to try this medicine and why ."
78 . A similar article in Barron's that same day, entitled "Pill Pusher: Drug maker
Biovail sparks controversy by paying doctors to write prescriptions," confirmed that PLACE was
scientifically worthless and nothing more than a marketing ploy . According to Barron 's,
"[d]espite the cover letter from a respected cardiology professor, the Biovail program that is
being pitched to physicians wasn't put together by academic researchers and isn't part of a Phase
III or IV study for the Food and Drug Administration - often a sign of rigorous research ."
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Further, Dr . Peter Goodfield, a cardiologist in Hendersonville, North Carolina was quoted as
saying: "It's rather transparent that Biovail is trying to get around [the American Medical
Association's rules on remuneration for prescribing drugs] by calling this research ."
79. Until these two articles were published in The Wall Street Journal and Barron 's ,
on July 21, 2003, Biovail had not disclosed that the PLACE program paid doctors to prescribe
Cardizem LA. Following the publication of these articles, Biovail received a letter from th e
United States Attorney for the District of Massachusetts that informed the Company that th e
United States Office of the Inspector General ("OIG") of Health and Human Services ha d
initiated a criminal investigation of the PLACE program . The Wall Street Journal first made the
investigation public on August 24, 2003 in an article entitled, "Biovail's Tactics on Marketin g
Heart Medicine Focus of Probe." This article described the PLACE program as what it was -- a
kickback scheme :
U.S . government regulators have launched an inquiry into whetherBiovail Corp . has been paying kickbacks to doctors who prescribea heart medication produced by the company . . . . At issue is amarketing effort in which Biovail, a large Canadian drug company,has been paying as much as $1,000 each to thousands of doctors in
the U.S. prescribing a new heart medication called Cardizem LA . .. . [R]egulators are concerned that some medical companies areadopting creative ways to market products, such as solicitingdoctors for pseudoclinical trials in which the doctors receivecompensation or educational grants . . . . Drug companies found tohave compensated doctors to encourage them to prescribe theirdrugs could violate federal antikickback statutes that preventillegal inducements to doctors that treat patients receivingMedicare or Medicaid benefits . The obvious concern : Suchpayments could interfere with the judgment of doctors .
80. Incentivized by Biovail's "kickbacks," doctors wrote thousands of Cardizem L A
prescriptions. Not surprisingly, Biovail repeatedly touted the number of prescriptions that ha d
been written - as opposed to the number of pills dispensed or the revenues actually generated --
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as proof that the Cardizem LA launch was a success . For example, in Biovail's July 29, 2003
conference call with analysts, Melnyk reported that "[b]y week 16 [after the launch], Cardizem
LA had nearly 166,000 prescriptions whereas Tiazac had reached 38,000 . Cardizem LA is
tracking over 4 .5 times better than Tiazac did 16 weeks after its launch by Forrest Labs ."
However, as is now apparent, 166,000 prescriptions was a completely misleading measure of
Cardizem LA's acceptance, given that the PLACE program had enrolled 17,000 doctors and
each doctor had to write 10 to 15 prescriptions to get paid .
81 . To implement the PLACE program, Witness 3 was instructed to find a mail orde r
house to process orders . "It was a monumental task," she said, and she actually was loaned the
corporate jet to fly to Florida to open an account with a mail order pharmacy . The mail order
pharmacy, however, was "horrible," according to Witness 3, because it could not process the
orders correctly and could not handle the volume . As a result, doctors were not getting paid,
even though they had satisfied the requirements under the program . According to Witness 3,
"doctors were furious . They weren't getting paid . "
82. Witness'2 also said that the mail order pharmacy failed to timely supply the
product to patients . Witness 2 had been told that the plan was that when the doctor faxed in a
Cardizem LA prescription the patient would get the drug within 72 hours. But this did not
happen. "Seventy-two hours turned into 4 to 5 days, to 7 days, and the whole thing was botched .
It was just a total disaster ." According to Witness 2, management should not have been telling
people that it was a successful launch because it simply wasn't .
83. The PLACE program was fundamentally flawed for another reason. In many
cases, once doctors received their $1,000 "bribe," they simply did not continue writing Cardizem
LA prescriptions . According to Confidential Witness 6, a sales representative at Biovail from
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July 2000 until October 2003, after physicians started getting paid their $1,000 for completing
the program and getting 15 patients on it, they stopped writing any more prescriptions . They
just did it for the money and did not believe in the product . She also added that Biovail got
thousands of prescriptions written in the second quarter 2003 because they were all paid for
through the PLACE program but that, in the third quarter 2003, when the renewals should have
been starting, they never happened.
E . Biovail Also Made Unreasonable Projections for 2003 Sales of the Cardizem Familyof Products Because by December 2002, Biovail's Distribution Channels wereStuffed with Cardizem CD
84. The February 7 Press Release projected an unreasonable amount of revenue in
2003 from Cardizem products (CD, SR and LA) : $140 to $200 million in the United States
alone. In addition, Biovail forecasted an undisclosed amount of Cardizem sales in Canada,
which was included in its "Biovail Pharmaceuticals Canada" revenue line of $75 to S100 million .
85 . These projections were unreasonable not only because of the sever e
manufacturing difficulties Biovail was experiencing with Cardizem LA, but also because the
Company had filled the channel with four months supply of Cardizem CD in December 2002 .
Four months supply is an extraordinary amount of product. Most pharmaceutical companies
keep two to four weeks of product in the channel and Biovail typically had maintained about one
month of Cardizem CD until that time . In fact, as of December of 1999, 2000 and 20U1, the
Cardizem CD inventory was 0 .9, 0 .9, and 1 .5 months, respectively . Biovail therefore knew that
sales of Cardizem CD in 2003 would be lower in light of the amount of extra product the
Company had "pre-sold" the prior year, as made evident from the excessive amount of inventory
in the channel in December 2002 compared to prior years, as reported below :
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Cardizem CD Dec-99 Dec - 00 Dec-01 Dec-02Inventory at AWP (in mans of $) 34 19
-23
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Inventory at 80% of AWP (in mins of $) 7.7 16 is 3 6
Inventory in caplets (in mins) 19 10 11 2 1Months of Inventory on Hand 0.9 0.9 1 .5 4 . 0
Source: HMO Nesbitt Burns research report dated Oct. 27, 2003 . Data obtained from IMS Heal th and NDCHealth
86. Cardizem 2003 sales projections of $140 to $200 million were also unreasonable
because demand for Cardizem CD had been dropping precipitously in 2002 . Prescriptions each
month in 2002 were down an average of 34% compared to the same month a year earlier. Given
that Cardizem product sales (CD and SR) in 2002 were $161 million, if the trend simpl y
continued, without any additional erosive factors, Biovail could project, at best, $106 million i n
revenues (66% of 2002 sales of $161 million) .
87 . But Biovail knew that sales would be even lower for two reasons . First, becaus e
2002 sales had been inflated, in large measure, by the unprecedented volume of sales into th e
channel in the fourth quarter of 2002 . Second, the launch of Cardizem LA in 2003 would
cannibalize sales of its CD product. Cardizem CD and LA are similar products . The only
difference is that LA is a once-a-day version of the same drug . Accordingly, any increase i n
sales of LA would have a negative effect on the sales of CD . Biovail recognized this in its first
quarter earnings conference call, when Melnyk admitted as much : "[w]e thought that it was one
of the smartest things we could do was to bring down [Cardizem] inventory - global inventor y
levels on all the products . The last thing in the world we wanted to do was to have a very
successful Cardizem LA launch and have the potential at the pharmacy level with any type o f
significant inventories of let's say Cardizem CD being there to be substitute for Cardizem LA . "
88. Simply put, Biovail's projection of $140 to $200 million of revenue fro m
Cardizem products in 2003 had no reasonable basis . Biovail could not manufacture Cardizem
2 Average Wholesaler Price
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LA. Sales of Cardizem CD were plummeting at a 34% rate on a year-over-year basis . The
channel had been pre-sold in 2002 with four months of supply . And any sales of Cardizem LA
would further cannibalize sales of Cardizem CD in 2003 . To this day, Biovail has not disclosed
its sales of all Cardizem related products in 2003 . Even when it filed its 2003 20-F with the
SEC, on May 14, 2003, it only revealed sales of Cardizem LA, which were $47 .7 million .
F. Biovail Continued to Knowinjjy Mislead Investors with Respect to the Launch ofCardizem LA After February 7, 2003
1. The March 4, 2003 Earnings Conference Cal l
89. On March 4, 2003, Biovail held a conference call with analysts to discuss its
results for the fourth quarter and full year 2002 . Melnyk, Howling and Crombie spoke on behalf
of Biovail and heavily promoted the upcoming launch of Cardizem LA . Melnyk reminded
analysts that "we entered into a co-promotion agreement with Reliant Pharmaceuticals to
strengthen our internal sales force, bringing our U.S . sales force total to over 800 in preparation
for the launch of Cardizem LA ." Poole, who also participated in the call, also promoted
Cardizem LA, and stated, "[w]e have finalized launch plans and programs for Cardizem LA and
have set up intensive training programs for our reps and our Reliant partner reps for late March ."
Ken Albert, vice-president of Biovail Clinical Development, stated, "[w]e are excited about
winning final approval for Cardizem LA from the FDA, and look forward to the upcoming
product launch ."
90. These statements were false and misleading because, as Defendants knew, the
Company simply did not have enough Cardizem LA to support the launch . In fact, when
research analysts asked defendant Crombie if Biovail was experiencing any manufacturing
constraints, he did not disclose the problems with Cardizem LA. Specifically, David Lickrish,
from Punk Ziegel & Company, asked Crombie, "T also wanted to know with respect to Tiazac ,
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given your ramping up of Cardizem LA here, are you running into any manufacturing constraint s
or anything of the like?"
91 . In response, Crombie told investors, "with respect to the manufacturing, we are -
we have just recently completed the expansion of our Steinbach plant . We added more than
enough capacity to meet the needs of the GSK for Wellbutrin . We continue to manufacture in
Puerto Rico, where most of our Tiazac and LA manufacturing is taking place . I think we are
well positioned ." Crombie then continued, "[w]e - in the last 12 months, we're upgrading, and
as you know, we acquired the Dorado, Puerto Rico facility, which is from Johnson & Johnson .
That's a substantial facility . We have just, as I said, we have had a significant expansion of our
Steinbach facilities . That's more than enough in the next several years of Wellbutrin production .
We're in good shape here . "
92. These statements were false and misleading because, as described above, th e
Company was experiencing devastating difficulties in manufacturing Cardizem LA .
93 . In the days following the conference call, the stock price rose from a closing pric e
of $36.06 on March 3, 2003, to $38 .95 per share by March 7, 2003 .
2 . The April 29, 2003 Press Releases and Conference Call
94. Fully cognizant of the fact that Wall Street was thirsting for positive news abou t
the launch of Cardizcni LA after April 2, the Defcndalits obliged . On April 29, 2003, Biovail
issued an earnings press release reporting first quarter 2003 results and listing Howling as a
contact . Biovail reported net income of S63 million and earnings per share of $0.39. These
earnings beat Wall Street's consensus forecast (as reported by Thompson One Analytics in its
website at http://www .thomsononeanal)tics .com) by one penny. The press release opened with
the statement, "Biovail Corporation today announced record financial results for the three month
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period ended March 31, 2003 and first month performance of Cardizem LA, which is in exces s
of 20,000 prescriptions ." Melnyk was also quoted, as follows :
The successful relaunch of Teveten, the launch of Teveten HCT
and the performance of Cardizem LA since its launch earlier thismonth demonstrates the effectiveness of our sales and marketingproduct launch capabilities . . . . Operationally, our managementteam has been strengthened, our pipeline programs are on track
including the expected launch of Wellbutrin XL in the second halfof 2003 and we continue to explore numerous opportunities .These and other activities give us confidence that we will meet orexceed our objective of 30% earnings per share growth for 2003 .
95 . That same day, Biovail issued a second press release, also with Howling as a
contact, specifically touting the launch of Cardizem LA. The press release was entitled, "Biovail
Reports Positive Cardizem LA Launch Results," and stated that prescriptions of Cardizem L A
exceeded 20,000 and that more than 45,000 retail pharmacies had the drug in stock, whic h
represented over 80% of the chain . It also discussed the PLACE program to investors , for the
first time, as follows :
Biovail is currently executing its planned multi-phased approach tothe launch of Cardizem(R)LA . A clinical experience programentitled P .L.A.C.E. (Proving LA through Clinical Experience) isbeing conducted as a means of introducing the unique attributes ofCardizem(R)LA to patients through targeted physicians . To ensurethese prescriptions are filled prior to the completion of the retailstocking program, the prescriptions written during Phase I werefilled through select mail order pharmacies . These mail orderorganizations do not report to IMS or NDC data tracking systems .As a result, there are 20,000 prescriptions filled over and above thetotal that appears in the IMS or NDC prescription summary data .
Significantly, the payments to doctors, or the amount, were not disclosed .
96. Both press releases issued on April 29, 2003 were prepared and disseminated wit h
the participation of the Individual Defendants and constituted the collective work of the
Individual Defendants in light of their direct involvement in the daily business of the Company.
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97. These rosy characterizations of the first phase of the Cardizem LA launch were
repeated during a conference call with investors that same day . Defendants Melnyk, Howling,
and Crombie participated in the call . Melnyk repeated the earnings report that had been include d
in the press release and continued to promote the success of the Cardizem LA launch. Melnyk
also told investors that "[i]n the latter part of March we held a national sales launch meeting with
our sales organization which included our Reliant partners, a group of over a thousand people .
Incredible energy enthusiasm and professionalism demonstrated by the two sales forces will go a
long way towards fueling the success of this product [Cardizem LA] in the market place ."
Melnyk went on to say:
We're only four weeks post-launch [of Cardizem LA] and we~areextremely pleased with the success we have had in this shortperiod of time . We surpassed our own expectations with respect toscrip numbers and getting positive feedback from physicians . Bothof these bode well for the future of this product . We've beentracking Cardizem LA against a post launch data from Tiazac, andthe early results clearly indicate that this product has hit the marketwith even greater force than Tiazac . We have achieved a level ofperformance we initially didn't expect to achieve until at leastJune. While these are still very early days, this result i sencouraging.
98. Petrillo, who also participated in the call, echoed Melnyk's assessment, stating ,
"we are currently executing a multi-pronged approach to the launch of Cardizem LA that is
proceeding exceptionally well in the early stages ." Petrillo also explained the purposes of the
PLACE program: "We are conducing this clinical experience program . . . as a means of quickly
introducing the unique attributes of Cardizem LA to appropriate patients first through those high-
value physicians . . . This program gives these physicians the opportunity to gain clinical
experience with Cardizem LA's sustain efficacy . "
99. Later in the call, in response to a question from an analyst, Melnyk added :
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Our manufacturing capacity was virtually dedicated to CardizemLA. We had in excess of 23,000 prescriptions written for the LAduring the launch period, and that's in four weeks . To put that inperspective, the total launch is 2,700 scrips, and Tiazac, which isbasically our bench mark, was around 1,300 versus 23,000 . So thedemand was, you know, pretty dramatic .
100. Melnyk also reiterated 2003 guidance based on sales of Cardizem LA an d
Wellbutrin XL, stating, "I think there's no change in our guidance . There's in fact, we're
reiterating our guidance for the year as far as EPS is concerned . You're going to see it coming
from our product sales of mainly Wellbutrin and from Cardizein LA ."
101 . In the same conference call, Howling stated,
Diluted earnings per share for first quarter 2003 was 39 centsversus diluted earnings per share of 32 cents for first quarter 2002,reflecting an increase of 22% .
Furthermore, inventory levels in the distribution channel forbranded Tiazac are also reduced given the utilization rate for thisproduct being lower now due to the introduction of a genericversion of Tiazac . This strategic initiative was undertaken to aid inthe stocking campaign of Cardizem LA . . . . The results of thisstrategy are already evident and in approximately four weeks wehave achieved retail stocking for Cardizem LA of over 40,000retail pharmacy outlets reflecting coverage of 80% .
102. Analysts eagerly accepted the Company's statements that the Cardizem L A
launch was a "success ." National Bank Financial issued a report on April 29, 2003, stating that
the reported 20,000 Cardizem LA prescriptions "is comparable to roughly 2,700 prescriptions for
the Benicar launch and 1,300 during the Tiazac launch for the first month . Biovail expects at
least a 30% rate of conversion of these initial 20,000 prescriptions to paying customers . The
realities of this will be evident in Q2 2003 . So far, we are very pleased with the response to th e
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Cardizem LA launch ." Unbeknownst to the analysts, they were relying on false and misleading
statements .
103 . The Company's statements were false and misleading for the reasons given
above. Biovail was fully aware that crippling manufacturing problems were impeding the
Cardizem LA launch and that its sales force simply did not have the product to sell . Biovail
knew that it could not meet earnings projections for the year for the reasons given above ,
including the manufacturing problems with Cardizem LA and the declining sales of Cardizem
CD . Finally, Biovail's much-touted 23,000 Cardizem LA prescriptions were misleading,
because Biovail did not inform investors that doctors were actually paid to prescribe the product,
much less that they were paid $1,000 to $1,500 to write 10-15 prescriptions . Biovail also misled
investors about the reason for instituting the PLACE program . As described above, the program
was developed as a method to disguise Biovail's manufacturing shortfall while inflating
prescriptions by paying doctors.
104. Biovail's report of its first quarter earnings was false for another reason : the
Company had met Wall Street analysts' expectations for first quarter earnings through an
improper accounting gimmick. The consensus estimate by research analysts of earnings per
share for that quarter was $0 .38 . When Biovail reported first quarter results on April 29, 2003, it
beat those expectations by a penny . To do so, however, it reported earnings that unbeknownst to
the public did not comply with GAAP accounting standards. The false earnings report was
subsequently filed on Form 6-K with the SEC on May 30, 2003 . On March 3, 2004, Biovail
issued a press release that disclosed, inter alia, that its earnings for the first three quarters of
2003 had been improperly reported under GAAP . As a result, Biovail was forced to restate
earnings for those three quarters .
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105 . A restatement is an accounting term of art, which means that previously issued
financial statements were not prepared in conformity with GAAP and that they materially
misstated Biovail's financial condition and results of operations . Under GAAP, a restatement of
a previously issued financial statement is the most serious step, reserved only for circumstances
where no lesser remedy is available . Under Accounting Principles Board Opinion No. 20,
Accounting Changes, prior period adjustments ("restatements") are only permitted (and are
required) to correct material accounting errors that existed at the time the financial statements
were previously issued .
106. On May 14, 2004, Biovail filed with the SEC an amended 6-K for the quarterly
period ended March 31, 2003, restating the 6-K previously filed on May 30, 2003 . The restated
financial statements for the first quarter showed that Biovail, in fact, had earnings per share of
$0.36, not the $0 .39 previously reported on April 29, 2003 .
107 . Biovail overstated earnings by manipulating the U .S. dollar foreign exchange rate
used to value an obligation that it had incurred in Canadian dollars . Specifically, in December
2002, Biovail had purchased the rights to two drugs in a transaction executed in Canadia n
dollars . At the time of the acquisition, Biovail recorded the acquired rights and a related long-
term obligation on its financial statements in U.S. dollars , using the exchange rate in effect on
the date of the acquisition . Therefore, to comply with GAAP, Biovail was required to adjust the
value of the long-term obligation each quarter to reflect any changes in the exchange rate
between the Canadian dollar (in which the obligation was to be satisfied) and the U .S. dollar (in
which the obligation was recorded in the financial statements) . Applying this principle, changes
in the exchange rate between year-end 2002 and the first quarter 2003 caused Biovail to incur a
$5 .4 million loss with respect to the value of this obligation . But Biovail chose to ignore GAA P
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and not record this $5 .4 loss . Had Biovail complied with GAAP and properly adjusted the value
of the obligation, it would have had to reduce earnings to 50 .36 per share, instead of $0 .39, a s
reported, and completely failed to meet the Street's earnings expectations of $0 .38 per share .
108 . Biovail specifically violated Statement on Financial Accounting Standard s
("SFAS") No. 52, paragraph 15, which explicitly requires that exchange rate fluctuations b e
reflected in the income statement, other than under certain exceptions that are not applicabl e
here. SFAS No . 52 states :
A change in exchange rates between the functional currency andthe currency in which a transaction is denominated increases or
decreases the expected amount of functional currency cash flowsupon settlement of the transaction. That increase or decrease inexpected functional currency cash flow is a foreign currencytransaction gain or loss that generally shall be included indetermining net income for the period in which the exchange ratechanges. Likewise a transaction gain or loss (measured from thetransaction date or the most recent intervening balance sheet date,whichever is later) realized upon settlement of a foreign currencytransaction generally shall be included in determining net incomefor the period in which the transaction is settled . The exceptions ofthis requirement for inclusion in net income of transaction gains
and losses are set forth in paragraphs 20 and 21 and pertain tocertain intercompany transactions and to transactions that aredesignated as, and effective as, economic hedges of netinvestments and foreign currency commitments. (Emphasis inoriginal) .
109. Because Biovail did not follow SFAS No . 52, it was forced to restate its financial
statements . The restatement for the first quarter 2003, said ,
RESTATEMENT AND RECLASSIFICATION OFCOMPARATIVE FIGURES
During the course of the preparation of its annual consolidated
financial statements, the Company determined that it had appliedan inappropriate exchange rate to a Canadian dollar denominatedlong-term obligation . In December 2002, the Company acquiredthe rights, through a subsidiary whose functional currency is theU.S . dollar, to Wellbutrin(R) SR and Zyban in Canada fro m
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GlaxoSmithKline plc in a transaction denominated in Canadiandollars . At the date of acquisition , the Company recorded theacquired assets and the related long-term obligation in U .S . dollarsat the exchange rate existing at that date . However, in thepreviously issued interim financial statements for 2003, theCompany did not adjust the Wellbut rin(R) obligation to reflectchanges in the exchange rate except for payments made on thatobligation when a foreign exchange loss was recorded on thosetransactions . There was no payment made on the Wellbutrin(R)obligation in the three months ended March 31, 2003 and, as aresult, there was no foreign exchange loss recorded in that pe riod .U.S . generally accepted accounting principles ("GAAP") requiremonetary balances denominated in a currency other than an entity'sfunctional currency be translated to reflect the exchange rates inexistence at each balance sheet date . Consequently, the translationof the Wellbutrin (R) obligation, using the exchange rates existingat March 31 , 2003, had the following impact on the Company'spreviously repo rted results of operations for the three monthsended March 31, 2003 :
Three Months EndedMarch 31, 200 3
Net income as previously reported $ 62,991Foreign exchange adjustment (5,392 )
110. Miszuk signed the Form 6-K filed on May 30, 2003, which was false and
misleading and which was also certified by Meln_yk and Crombie as required by the Sarbanes-
Oxley Act of 2002, 15 U .S .C.A. §§ 7201 et seq . The certifications signed by Melnyk and
Crombie explicitly represented, falsely, that the financial statements reported in the 6-Ks were
not false and misleading . The certifications stated :
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Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Chapter 63, Title 18 U.S .C . §1350(a) and (b)), the undersignedhereby certifies that the Report of Foreign Private Issuer on Form6-K for the quarterly period ended March 31, 2003 of BiovailCorporation (the "Company") fully complies with the requirementsof Section 13(a) or Section 15(d) of the Securities Exchange Act of1934 (15 U.S.C. 78m(a) or 78o(d)) and that the informationcontained in such Report fairly presents, in all material respects,the financial condition and results of operations of the Company .
3 . May 7, 2003 Press Releas e
111 . On May 7, 2003, Biovail continued to hype the Cardizem LA launch . In a press
release listing Howling as a contact, the Company announced that "Biovail has signe d
agreements giving Cardizem LA a favorable formulary position with a number of Pharmac y
Benefits Managers (PBMs) and Managed Care Organizations (MCOs) ." The release quote d
Mclnyk as saying, "This is an excellent position for Cardizem LA to be in four weeks post-
launch . . . . The favorable formulary coverage . . . will offer an additional opportunity fo r
physicians to continue to choose Cardizem LA for their patients ." After the press release ,
Biovail's stock rose from a closing price of $39 .80 on May 6, 2003 to $50.30 on June 5, 2003 ,
the Class Period high .
112. These statements were false and misleading because, as Biovail knew but did no t
disclose, crippling manufacturing problems coupled with the fact that Biovail had paid doctors t o
prescribe Cardizcin LA meant that the launch was not as successful as Biovail claimed .
113 . On July 21, 2003, however, some of the details of Biovail's PLACE program ,
which had been previously undisclosed, were revealed to the market. The two articles described
above from The Wall Street Journal and Barron 's exposed that Biovail had been paying doctor s
for prescriptions . The market reacted negatively to these disclosures and on July 21, 2003, the
day the articles appeared, Biovail's stock closed at $39 .17, down from its previous closing price
of $41 per share on July 18, 2003 .
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114 . The press release issued on May 7, 2003 was prepared and disseminated with th e
participation of the Individual Defendants and constituted the collective work of the Individua l
Defendants in light of their direct involvement in the daily business of the Company .
4 . The July 29, 2003 Earnings Release and Conference Call s
115 . On July 29, 2003, Biovail issued a press release announcing financial results for
the second quarter of 2003 and listing Howling as a contact . The Company reported revenues o f
$217.3 million, which reflected revenue growth of only 17% compared to second quarter 200 2
revenues of $185 .1 million . Product revenues were especially flat year over year, $157 .7 million
in the second quarter of 2003 compared to $157 .8 million in the same quarter of 2002 . The
release pointed out, however, that although GAAP net income resulted in a loss of one penny per
share, when excluding a one-time charge for acquired research and development, net income was
$83.2 million for the second quarter 2003 and diluted earnings per share $0 .52, a 33% increase
over the same period the prior year. The press release quoted Melnyk, who said, "The dramatic
increase in market share for Biovail's Cardizem franchise from 7% to over 11% in the 16 week s
since the launch of Cardizem LA has surpassed our expectations ."
Biovail Corporation announced today record financial results forthe three months and six month periods ending June 30, 2003 . . . .Contributing to these favorable results was the launch of CardizemLA in April 2003, contributions from Wellbutrin XL, whichreceived an Approvable Letter in June 2003, growth from
Canadian product sales and the benefit from an economic interestin the gross profits from the sales of a generic version of Prilosec .
Second quarter 2003 net loss of $1 .0 million and diluted loss pershare of $0 .01 compared to net income of $62.6 million anddiluted earnings per share of $0 .39 for second quarter 2002 .
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Excluding acquired research and development, second quarter2003 net income of $83 .2 million and diluted earnings per share of$0.52 both grew 33% versus comparable 2002 results of $62 .5million and $0 .39 per share
Second quarter 2003 net loss of $1 .0 million and diluted loss pershare of $0.01 compared to net income of $62 .6 million anddiluted earnings per share of $0 .39 for second quarter 2002 . . . .First half 2003 net income of $62 .0 million and diluted earningsper share of $0 .39 compared to net income of $115 .6 million anddiluted earnings per share of $0 .70 for the 2002 first half .
Product sales revenues for second quarter 2003 of $157 .7compared to $157.8 million for second quarter 2002 . First half2003 product sales revenue of $284 .6 million compared to firsthalf 2002 product sales revenue of $287 .6 million . Product saleswere favorably impacted in the second quarter and first half of2003 by Canadian product sales revenues, the launch of CardizemLA and by revenues related to the upcoming launch of WellhutrinXL. Generic product sales to Teva Pharmaceuticals were less thanexpected during the second quarter and are tracking well below
underlying prescription trends for the primary products in thisportfolio . Biovail is working with Teva Pharmaceuticals to betterunderstand this inconsistency and resolve the situationexpeditiously. Additionally, supply constraints related to brandedCardizem CD, which is manufactured by Aventis Pharmaceuticals,resulted in a backorder situation of approximately $20 million .Biovail is currently working with Aventis to rectify this .
117. The press release issued on July 29, 2003 was prepared and disseminated with th e
participation of the Individual Defendants and constituted the collective work of the Individual
Defendants in light of their direct involvement in the daily business of the Company .
118 . On that same day, Biovail also held a conference call with analysts . Defendant s
Melnyk, Howling, and Crombic participated in the call . Melnyk and Howling repeated the
earnings release statement that, excluding acquired research and development, net income for th e
quarter was $0 .52 per share, representing a 33% increase over the same period the prior year .
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119. Additionally, Melnyk attempted to minimize the impact that the PLACE program
had had on prescriptions of Cardizem LA . Melnyk did not state, however, that PLACE had paid
doctors millions of dollars, in the aggregate, to prescribe Cardizem LA in the initial phase of the
launch and, instead, reported that "[b]y week 16 [after the launch], Cardizem LA had nearly
166,000 prescriptions whereas Tiazac had reached 38,000 . Cardizcrn LA is tracking over 4 .5
times better than Tiazac did 16 weeks after its launch by Forrest Labs . "
120. Melnyk continued,
Although these are very early results, we are very encouraged bythis trend and believe it is an indication that physicians areadopting Cardizem LA in their hypertension treatment ofprograms. Total prescriptions are starting to separate from new
prescriptions which is a good indication that patients areresponding favorably to the product . To better evaluate CardizemLA's performance Biovail initiated a commonly used researchprogram known as a clinical experience program .
PLACE, or Proving LA through Clinical Experience, was designedto provide important information regarding certain variables that
physicians consider when prescribing hypertensive agents and toprovide information regarding Cardizem LA's performance in aclinical practice setting .
To ensure that everyone has a good understanding of the program,I will take a few minutes to describe how the program worked andthe expected uses of the data being compiled . Patients enrolled inthe study had Cardizem LA supplied to them by Biovail free ofcharge via prescription and a free goods coupon. QuintilesTransnational managed the mechanics of receiving and processingthe enrollment forms . For this program we targeted 25,000 doctorsand expected between 6,000 and 6,500 to participate .
The program generated greater than expected interest due to
Cardizem recognition and physician desire to evaluate CardizemLA in their practices. As a result approximately 17,000 doctorswere enrolled . In addition to patient specific data such as gender,blood pressure levels and ethnicity, we are gathering broad datasuch as the risk factors physicians consider when prescribing anantihypertensive for a patient and the number of new or
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uncontrolled patients a physician may see in a specific period oftime .
This information is of value as we can use it to design future phaseIV clinical trials and publish the data to provide physicians with abetter understanding of how Cardizem LA may be used to meettheir patients' needs. One final comment on PLACE. Recentmedia stories have attempted to describe these type of researchprograms negatively . It is important to point out that in Biovail'sPLACE programs, doctors only receive honorariums if theycompleted all necessary documentation including the detailed finalevaluation questionnaire which is a critical component for the finalpublication report . We believe this program is in full compliance
with all applicable, regulatory and legal requirements .
121 . The statements in the earnings release and conference call were false an d
misleading . As Biovail knew, manufacturing problems had crippled the Cardizem LA launch .
Moreover, the 166,000 prescriptions was a misleading measure of success, given that the PLACE
program had enrolled 17,000 doctors . Finally, while Biovail trumpeted its PLACE program an d
the number of Cardizem LA prescriptions written by doctors, it did not report actual sale s
numbers of Cardizem LA . It took this tack because the Company knew that sales to patients
were lagging as a result of, among other things, the lack of availability of the product at the retail
level due to Biovail's manufacturing problems. Indeed, many of the prescriptions that had been
written by doctors in connection with the PLACE program never actually got filled .
Significantly, Biovail did not break out in its financial statements the actual sales of Cardize m
LA in 2003 until May 14, 2004 - two months after the end of the Class Period .
122 . Once "phase one" of the Cardizem LA launch was completed and the PLAC E
program terminated , prescriptions and sales of Cardizem LA fell off the cliff. Sales of Cardizem
LA in the second quarter of 2003 (the first quarter it was launched) were $21 .6 million . But
according to Witness 2, these sales reflected shipments to wholesalers and the stocking of th e
distribution chain . It did not reflect actual sales to patients, which ultimately is the metric tha t
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investors need to properly assess the sales potential of Cardizem LA and the value of Biovail
stock. As would later be revealed, Cardizem LA sales dropped shockingly in the subsequent
quarter (the third quarter 2003) to $6 .2 million . These figures, which were subsequently
revealed in May 2004, prove that once wholesalers were supplied with the product, patients
simply failed to purchase the drug .
123 . Additionally, during the conference call, Biovail reiterated its full year revenue
guidance. Howling stated,
We feel it is prudent to reduce our generic controlled releaseproduct sales and total product sales guidance for the balance ofthe year by $20 to $30 million . We are also upwardly revising thelow end of previously issued royalty and co-promote revenuefinancial guidance by $20 million as our economic interest and thegross profits associated with the sales of a generic version ofPrilosec to continue to exceed our expectations. These twochanges leave total revenue guidance unchanged .
124. This projection was false and misleading not only because of the problems th e
Company was experiencing with Cardizem LA and the impossibility of Cardizem CD filling in
the gap, but also because of the results the Company had already reported during the year . The
Company's first and second quarter results were substantially below the Company's February 7,
2003 guidance of 30% revenue growth for 2003 . To bolster its continued assertion of 30%
yearly revenue growth, Defendants concocted a bigger excuse : that Biovail had orders for and
was prepared to ship $20 million of Cardizem CD, but had been unable to fill those orders due to
the inability of the drug's manufacturer, Aventis, to fill Biovail's back order for $20 million o f
Cardizem CD . As Howling stated, "We currently have a backorder position on Cardizem CD of
approximately $20 million and are working with Aventis who supplied this product to us to
rectify the situation." Biovail told investors that, but for the "backorder problem," revenues in
the second quarter 2003 would have been $237 .3 million, representing revenue growth of 28 %
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compared to the second quarter of 2002, and right in line with the Company's growth guidance
of 30% for the year .
125 . Analysts questioned Biovail's explanation that there was an unfilled backorder for
Cardizem CD in the second quarter conference call on July 29, 2003 . Inventory in the channel at
the end of the quarter reflected a supply of $32 million (on an AWP basis), or more than 3
months of inventory on hand, which, on the surface, contradicted the Company's explanation .
Melnyk responded in the second quarter conference call by saying that although there was a
large inventory of Cardizem CD in the channel, a particular dosage (360mg), was virtually not
available . This dosage was especially profitable for Biovail because it had no generic
competition . Melnyk explained : "If you take a look at the wholesaler inventory levels and I'm
going to get very specific, the 360 milligram, it is depleted . So a big bulk of the 360 is just not
out there . So that is about 70 percent of that S20 million- "
126. In the same conference call, Corey Davis, the J .P. Morgan analyst, asked point
blank: "So this [backorder] is not a major problem and we should just shift that $20 million into
the next quarter?" Melnyk responded, "Yes, no question."
127. The truth was that no such backorder existed. The Company would eventually
admit this at the end of the Class Period in its early morning press release and conference call on
March 3, 2004 . But before doing so, it stalled analysts again with false claims that the backorder
persisted during its third quarter conference call on October 30, 2003 . Thus, Biovail's projected
revenues for the year, as well as its claim to be experiencing a Cardizem CD backorder, were
false and misleading, both because no such backorder existed, and because the problem with
Cardizem LA launch coupled with the decline in Cardizem CD sales made the projected
revenues and earnings per share growth for 2003 impossible to achieve. Witness 1, in fact,
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confirmed that there was no such backorder, and stated that from late 2002 through October 2003
wholesalers were stocked with several months supply of Cardizem CD's most popular strengths :
360mg, 240mg, and 180mg .
128. Biovail's second quarter earnings release and conference call were false fo r
another reason. Biovail used the same accounting trick to inflate earnings in the second quarter
of 2003 that it had used in the first quarter . In its Form 6-K filed with the SEC on August 29,
2003, and signed by Miszuk, the Company reported a loss of one penny . The loss was due to an
expense of $84.2 million for acquired R&D. Because one-time expenses are usually not
meaningful for valuation purposes on an ongoing basis, Wall Street analysts and investors prefer
to back-out these charges and analyze earnings per share as if these expenses had not occurred .
Accordingly, it is common for companies to present earnings in their press release on a GAAP
basis (here a loss of $0.01), and on a non-GAAP basis, which, for Biovail's second quarter,
translated into earnings of $0.52 per share . Biovail touted this number by including it as one of
three bullet points heading its earnings press release : "Diluted EPS excluding charges increased
33% to $0.52 for second quarter 2003 ."
129. Biovail did not disclose, however, that it had artificially boosted earnings by
$0.02 per share by failing to recognize a loss due to exchange rate fluctuations in violation of
GAAP, just as it had for the first quarter. Accordingly, on May 14, 2004 , the Company was
forced to amend its previously filed August 29, 2003 6-K for the three months ended June 30,
2003 . The amended 6-K restated earnings as follows :
RESTATEMENT AND RECLASSIFICATION OFCOMPARATIVE FIGURES
During the course of the preparation of its annual consolidatedfinancial statements , the Company determined that it had appliedan inappropriate exchange rate to a Canadian dollar denominate d
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long-term obligation. In December 2002, the Company acquiredthe rights, through a subsidiary whose functional currency is theU.S dollar, to Wellhutrin(R) SR and Zyhan in Canada from
GlaxoSmithKline plc ("GSK") in a transaction denominated inCanadian dollars . At the date of acquisition, the Company recordedthe acquired assets and the related long-term obligation in U .S .dollars at the exchange rate existing at that date . However, in thepreviously issued interim financial statements for 2003, theCompany did not adjust the Wellbutrin(R) obligation to reflectchanges in the exchange rate except for payments made on thatobligation when a foreign exchange loss ($2,673,000 for both thethree months and six months ended June 30, 2003) was recordedon those transactions . U.S. generally accepted accountingprinciples ("GAAP") require monetary balances denominated in acurrency other than an entity's functional currency be translated toreflect the exchange rates in existence at each balance sheet date .Consequently, the translation of the Wellbutrin(R) obligation,using the exchange rates existing at March 31, 2003 and June 30,
2003, had the following impact on the Company's previouslyreported results of operations for the three months and six monthsended June 30, 2003 :
Three Months Six MonthsEnded EndedJune 30, 2003 June 30, 2003
Net income (loss) as previously reported $ (1,012) $ 61,979Foreign exchange adjustments (3,928) (9,320 )
130. The Form 6-K filed on August 29, 2003, was also false and misleading becaus e
Melnyk and Crombie falsely certified that the financial statements reported in the 6-K were not
false and misleading.
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G. The Fraud Is Partially Revealed, But Defendants Continued to Lie to Investor s
1 . On October 3, 2003, Biovail Announced That It Had Missed Its ThirdQuarter Estimates, But Lied About the Reasons to Hide the Fact thatRevenue from Cardizem LA Had Been Disastrou s
131 . On October 3, 2003, Biovail unexpectedly issued a press release and convened a
conference call to announce that it had significantly missed third quarter earnings . This
information surprised investors and Wall Street analysts. Melnyk and Crombie participated in
the call . Crombie told investors, "[o]ur previous guidance for revenue for Q3, 2003, should
therefore be reduced by approximately $45 million, resulting in new guidance for Q3 for total
revenue of between $215 million and $250 million." This guidance was down from the February
7 guidance of $260 to $300 million . Earnings per share would be reduced by 23 cents, from 58-
68 cents to 35-45 cents . In response, Biovail's stock plunged 18% - from $37 .77 per share to
$31 .10 per share, on abnormally heavy volume .
132 . Melnyk and Crombie blamed three unexpected events for Biovail's failure t o
meet its published guidance . First, there was a vehicular accident in the outskirts of Chicago that
compromised the delivery of a shipment of Wellhutrin XT, that Defendants claimed was worth
approximately $15 to $20 million . On September 30, 2003, just hours before the end of the
quarter, a truck loaded with Wellbutrin XL pallets for delivery to GSK had left the Company's
Steinbach Manufacturing Facility in Canada . The next day, on October 1, a multi-car pile up
occurred just outside Chicago, in which eight people lost their lives . The truck was involved in
the accident, although it was not part of the main collision . In the October 3 conference call,
Crombie claimed that ,
The unfortunate incident described by Eugene [Melnyk] a momentago, will have a material negative effect on Biovail's third quarterrevenue and earnings .
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As a result of this accident, Biovail currently estimates that its totalthird quarter revenues from Weilbutrin XL will now be below $10million. It is not yet known whether or not the prndnct involved inthe accident will be salvageable . This product must be sent back toour manufacturing facility for careful inspection to determine if theproduct still meets all applicable manufacturing specifications andis completely safe for future sales .
Our Wellbutrin XL supply agreement gives Glaxo the right to
return product that does not meet required manufacturing
specifications as approved by the Food and Drug Administration .
As it is unknown at this point whether or not the product involvedin the accident still meets all applicable manufacturingspecifications, Biovail will not be recording any revenueassociated with this shipment in Q3 .
133 . Second, Melnyk attributed the shortfall to the same problem experienced in th e
second quarter 2003 with the backorder of Cardizem CD. He estimated that the impact o n
revenues in the third quarter 2003 would be $10 to $15 million . In this regard, Crombie added ,
. . . . at the end of the second quarter, we announced that we had abackorder position on Cardizem CD in excess of $20 million .
This was caused by numerous factors . We have been veryconscious of trade inventory levels and we have come to theconclusion that where the smaller brand, such as Cardizern CD toinsure that we don't have backorders and that we meet demand, alarger amount of trade inventory is required .
We also had frankly expected an increase in the months ofinventory due to expected cannibalization from Cardizem LA .Based on our source of prescription tracking, Cardizem LA isgaining most of its prescriptions not from switching fromCardizem CD, but from new patients being prescribed calciumchannel blockers . . . .
During the third quarter 2003, Biovail has been working diligentlywith Aventis, the supplier of brand Cardizem CD to alleviate the
backorder position . Considerable progress has been made during
this quarter, with additional shipments from Aventis, alleviating
almost half of the backorder position as of June 30th; however,
some additional shipments, which had been anticipated prior to
September 30th, actually arrived immediately following quarter
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end. As a result, these additional shipments will not be included inour third quarter 2000 revenue, 2003 revenue as hoped for, but willfavorably impact fourth quarter 2003 revenue .
In addition, because of the strong sales of Cardizem 360, thebackorder position of Cardizem CD has grown again, back up toalmost $20 million .
134. Third, Melnylc claimed that Biovail had recently been informed that its economi c
interest in the sale of Prilosec had been negatively affected by certain retroactive price reductions
granted by the distributor and beyond Biovail ' s control .
135 . Crombie summarized the impact on third quarter revenue as follows :
The impacts of the items discussed today will have the followingimpacts on Q3 revenue . First, the impact of Wellbutrin loss due tothe accident is in the range of $15 to $20 million . Second, theimpact of lost royalty revenue due to Prilosec is in the range of $20million . Third, the impact of Cardizem CD revenue is in the rangeof $10 to $15 million . . . .
The net income impact from the above is in the range of $35 to S45million or new EPS guidance 23 cents less than previous guidancefor a new total full diluted EPS guidance for Q3 of 2003 ofbetween 35 and 45 cents .
136. The press release, issued on the same day of the conference call, and listing
Howling as a contact, stated as follows :
Biovail Provides Guidance on 2003 Third Quarter Result s
IURUNIO--(BUSINESS WIRE)--Oct . 3, 2003--Biovail Corporation(NYSE:BVF)(TSX :BVF) announced today that while it has not completed a finalcompilation and analysis of its 2003 third quarter, preliminary results indicate thatrevenues will be below previously issued guidance and will be in the range of $215million to $235 million and earnings per share of $0 .35 to $0 .45 for the three monthsended September 30, 2003 . Contributing significantly to this unfavorable variance wasthe loss of revenue and income associated with a significant in-transit shipment lossof Wellbutrin XL as a result of a traffic accident .
After leaving Biovail's Steinbach, Manitoba manufacturing facility on September 30,2003, a truck carrying a material shipment of Welibutrin XL was involved in a multi-vehicle traffic accident at approximately 4 p .m . eastern standard time October 1, 2003near Chicago, Illinois . While this product may still be salable in the future, it must firstbe returned for inspection to Biovail's manufacturing facility in Manitoba to ensure it isstill within acceptable specifications . Revenue associated with this shipment is in therange of S10 to $20 million. The manufacturing cost value of this shipment was fullyinsured .
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As a result of numerous recent inquiries, Biovail also cornments on two additionalitems associated with third quarter income.
Biuveil has an euuriuiiiic interest in the gross profits derived from the sales of ageneric version of omeprazole . The distributor of this generic omeprazole product hasannounced that it will provide significant price reductions on a retroactive basis towholesalers . This distributor has also indicated that it will be lowering its financialguidance for this product given lower pricing and for competitive reasons, Biovail'ssecond half 2003 financial guidance assumed that additional competition for genericomeprazole would seriously erode the financial benefit to the Company's interest inthe gross profits of this product . However, since Biovail shares in a percentage of thegross profit of this product, significant credits issued by the distributor during the thirdquarter 2003 could have a negative effect on Biovail's participating interest of up to$15 million in net income . As well, it can be anticipated that there could be a fourthquarter 2003 negative income impact of $15 to $20 million .
During the third quarter 2003, Biovail was working with Aventis, the supplier ofbranded Cardizem CD product, to alleviate a back order position that existed at theend of June 2003. Considerable progress was made in this regard during the thirdquarter 2003 and additional shipments from Aventis were received in Q3 however,further shipments, which had been anticipated prior to September 30, 2003 arrivedimmediately following quarter-end . As a result, these additional shipments will not beincluded in third quarter 2003 revenue as expected but will favorably impact fourthquarter 2003 revenue . During third quarter 2003, approximately half of the June 30,2003 back order position was alleviated however, due to continued strong sales ofCardizem CD 360 mg and new orders for this dosage strength, backorders haveincreased to approximately $18 million as at September 30, 2003 . We will continue towork with Aventis to rectify this situation expeditiously .
137 . The press release issued on October 3, 2003 was prepared and disseminated wit h
the participation of the Individual Defendants and constituted the collective work of th e
Individual Defendants in light of their direct involvement in the daily business of the Company.
138 . The first two reasons Biovail propounded for its earnings disappointments wer e
deliberate falsehoods . Neither the trucking accident nor the Cardizem CD backorder ha d
anything to do with Biovail's failure to meet its projections, which was rather due to Biovail' s
inability to sell Cardizem LA . Cardizem LA sales in that third quarter plummeted to $6 .2
million from $21 .6 million in the second quarter. But because Cardizem LA was the flagship
product and Biovail had been hiding its significant problems with Cardizem LA throughout the
Class Period, the Company shifted the blame for the earnings miss to Cardizem CD and th e
trucking accident. It then masked the dismal revenues of Cardizem LA by reporting thos e
revenues together with revenues from Zovirax and Teveten products, which, combined, totale d
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$60.1 million . Biovail did not break out Cardizem LA's quarterly revenue in the third quarter
until May 14, 2004, when it filed its 2003 20-F with the SEC .
(a) Biovail's Claim that Part of the Earnings Shortfall in the ThirdQuarter of 2003 Was Due to the Wellbutrin XL Trucking Accidentwas Untrue
139 . Immediately after Biovail announced the Wellbutrin XL truck accident, there wa s
considerable controversy in the Wall Street analyst community concerning whether the truck
actually carried $15 to $20 million of Wellbutrin XL, as Crombie had stated during the
conference call, or even the $10 million lower figure listed in the Biovail press release . Some
analysts and reporters suspected that Biovail had inflated the amount of product in the truck to
hide the fact that its third quarter earnings had been disastrous . Others stood by the Company's
version of events .
140 Bane of America Securities analyst David Mar's ("Mar's") published a research
note on October 8, 2003, raising questions about Biovail's disclosures relating to the truck
accident. According to Maris, his investigation suggested that the Company had significantly
overestimated the amount of Wellbutrin XL on the truck . If there had been $20 million worth of
Wellbutrin XL pills on that truck, it would have been full, or nearly full, said Maris . But
evidence suggested that the truck was at least half-empty . Melnyk publicly denied Maris's
suggestion that there was not $15 to $20 million of Wellbutrin XL on the truck, calling it
"outrageous and irresponsible," according to a Dow Jones wire service story that day . A
subsequent statement issued by the Company also that day said that the truck was carrying
between $10 million and $20 million in Wellbutrin XL and that it believed that about 60% of the
cargo was still saleable . The price of Biovail stock dropped to $25 .20 per share on October 8,
2003 from its closing price of $29.05 the day before . Investors lost more than $550 million in
market value .
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141 . J.P. Morgan's analyst Corey Davis accepted Biovail's public representations that
the Wellbutrin XL truck accident had reduced third quarter earnings by $15 to $20 million .
Davis therefore told investors that the truck accident was an unfortunate one-time event that did
not affect his valuation of the stock and continued to rate the stock "overweight ." In an October
6, 2003 research report, he stated, "two of the three reasons for the Q3 shortfall (Wellbutrin XL
shipping accident and Cardizem CD production at Aventis) are coming from simple shifts of Q3
revenue into Q4." Davis therefore concluded that "the single biggest reason [Wellbutrin XL] to
own this stock remains intact . "
142. First hand accounts of the accident, however, confirm that the amount of
Wellbutrin XL on the truck was nowhere close to the $15 to $20 million alleged by th e
Company. According to Illinois State Trooper Francesca Sciuto ("Trooper Sciuto"), badge #
2291, who was the first trooper on the scene, Penner International operated the 1998 Ford tractor
trailer involved in the accident on behalf of Biovail . Sciuto stated that according to her personal
notes, which reflected information obtained directly from the bill of lading, she recorded only
eight pallets of product and the total weight of the shipment as 11,690 pounds - all of it
Wellbutrin XL, as the truck had no other cargo . She estimated that the truck was about a quarter
full and that even 25 pallets would not have filled up a tractor-trailer of the size involved in the
accident. Moreover, the product had not been damaged and no product had been spilled on the
floor of the truck . Based on the shipment's weight and an estimate of the number of pills in the
shipment, it was impossible for the truck to have contained more than $5 million worth of
revenue .
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(b) Biovail's Claim that Part of the Earnings Shortfall in the Third
Quarter of 2003 Was Due to a Backorder of Cardizem CD was
Materially Untru e
143. In the October 3, 2003 conference call, Melnyk again blamed the third quarte r
revenue shortfall, in part, on Aventis's inability to fill a $20 million backorder for Cardizem CD .
As described above, the Company had falsely claimed on July 29, 2003 that there was a $2 0
million backorder of Cardizem CD .
144. Analysts once again prodded Melnyk, who again reassured them that the revenue
would be made up by the end of 2003 . Corey Davis, from J .P . Morgan, asked, "I'm still a littl e
bit unclear on Cardizem CD and whether or not this is going to be, like, an ongoing productio n
problem with Aventis ." Melnyk then responded as follows :
No, let me address that because it's - Aventis actually onlymanufactures this product twice a year . They manufacture it forBiovail and they manufacture it for their Australian subsidiariesand New Zealand subsidiaries . They were doing - completing aproduction run this last quarter for their Australian subsidiary andwe were, you know, lucky enough to be able to get some of thatinto Biovail . They're now doing another major production run thisquarter, which is ongoing right now, and some of that was justliterally received yesterday and we expect to have this all clearedup by the end of the year .
145 . These statements were false and misleading for the same reason simila r
representations were false in July 29, 2003 . The Company would later admit that no backorder
existed and, according to Witness 1, during this period, wholesalers were stocked with months o f
supply of Cardizem CD, including the 360mg dose .
2. October 30, 2003 Earnings Release and Conference Cal l
146. On October 30, 2003, Biovail issued its earnings release for the third quarter o f
2003 . Biovail announced total revenues for the quarter of $215 .3 million, just barely skirting th e
lower edge of its new, lowered guidance issued less than a month earlier . Shockingly, despite
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the fact that less than a month earlier, and after the quarter had ended, Biovail had projected
earnings per share of $0 .35 to $0 .45, Biovail now announced that it had only earned $0 .08 per
share ($0.22 per share excluding certain charges), or $13 million . Even these figures, Biovail
would eventually disclose, were misleading because they included a one-time gain of $8 .5
million.
147 . The press release issued on October 30, 2003 was prepared and disseminated with
the participation of the Individual Defendants and constituted the collective work of the
individual Defendants in light of their direct involvement in the daily business of the Company .
148. That same day, Biovail held a conference call with analysts to discuss thir d
quarter results . Defendants Melnyk, Howling, and Crombie participated in the call . In light of
the Company's abysmal performance, Melnyk made a new pledge to investors : "Let me
underscore that we listened to comments on the level of our disclosure, the complexities of past
transactions and the apparent lack of transparency in our reporting and we are addressing each of
these concerns, and, as a start, we are altering the way we describe operations and performance . "
149. Despite Melnyk's new commitment to transparency in reporting, however,
Biovail continued to obscure its true results . It masked the disastrous sales of Cardizem LA by
lumping together the sales of Teveten products, Zovirax products, and Cardizem LA into a new
reported sales of Core Products for the third quarter of $60 .1 million. This was the first time the
Company reported numbers in this manner . The Company knew that if it broke out the sales by
product, analysts and investors would immediately realize that the launch of Cardizem LA had
been a complete failure . Unbeknownst to the public, the $60 .1 million included $47 .1 million in
sales of Zovirax products, which the prior quarter had represented only $18 .0 million. In the
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fourth quarter 2003, after the Zovirax channel had been fully stuffed, sales of Zovirax
plummeted to $117 million, a 75% drop. Biovail did not disclnse the sales breakdown of th e
Core Product category by quarter, until it filed its 2003 20-F with the SEC on May 14, 2004 .
150. Former Biovail employees con firmed that the Company stuffed the channel with
Zovirax in the third quarter of 2003 . At the time, Zovii ax consisted of two products : an
ointment, which was a product that had been on the market for a number of years, and a new
cream-based formulation. According to Confidential Witness 4, a former product manager who
worked at the Company from February 2001 through February 2004, Biovail 's usual practice
was to have its Finance division - Crombie and Scott Langille, later replaced by Miszuk -
communicate sales targets to the marketing directors in October 2002 for the following year.
151 . Witness 4 held two jobs in North Carolina while employed at Biovail . His first
job, which lasted for about 18 months, was being a product manager for the Company' s
antibiotic drugs, Cedax and Keftab . He reported to a director of marketing (Tim Slone), who i n
turn reported to the Vice President of Marketing (Ken McBain) . Slone and McBain were bot h
based in Raleigh, North Carolina . Witness 4's duties involved gathering sales data on the
antibiotics, interacting with Biovail 's adve rt ising agency, forecasting sales, and directing the
messaging to the field sales force . Witness 4 was subsequently brought in to help with the
PLACE program.
152 . His second job was being a sales manager in Virginia and North Carolina, wit h
nine sales representatives reporting to him . Witness 4 reported to a regional director of sales ,
who in turn reported to the national director of sales -- Mike Goolsby . The national director o f
sales reported to Matt Heck .
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153. Witness 4 recalls that in the middle of 2003, Biovail Finance contacted the
marketing directors and instructed them to drastically increase their sales of Zovirax ointment .
Witness 4 explained that "there was a lot of angst that we were going to miss the [third] quarter .
We had made the numbers every other quarter, but people felt we might miss this one ." As a
result , Witness 4 said, "Zovirax was stuffed like you wouldn't believe ." Witness 4 explained
that the marketing directors believed that Biovail Finance had changed its instructions wit h
respect to sales of Zovirax ointment in order to meet quarterly projections .
154. According to Witness 4, Slone objected to the new instructions because he knew
that such sales of Zovirax ointment in the third quarter would result in a drop in fourth quarter
sales, but Biovail Finance insisted. This resulted in sales of $47 .1 million worth of Zovirax in
the third quarter of 2003, despite the fact that sales of Zovirax ointment had been steadil y
declining . Witness 4 was aware of Slone's objections because he used to work with Slone to sel l
other products, and he and Slone were in constant communication during this period .
155 . As a result of these efforts, by the end of the third quarter of 2003, wholesalers
had twice the amount of inventory of Zovirax ointment than they had stocked in the third quarte r
of 2002, despite the fact that prescriptions of Zovirax ointment declined 7% from the prior year
period. Witness 4 estimated that by the end of the third quarter 2003, wholesalers were stocked
with $40 million worth of Zovirax ointment . By overselling Zovirax ointment in the third
quarter of 2003 and lumping the Zovirax sales in with Cardizem LA sales, Biovail attempted to
mask Cardizem LA's poor performance. In fact, as the Company would later reveal in May
2004, Cardizem LA sales had plummeted to $6 .2 million.
156. During the October 30, 2003 conference call, Melnyk also continued to mislea d
investors about the supposed "backlog" of Cardizem CD . One analyst asked :
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Analyst : Second question, can you provide any further input
as to the Aventis Cardizem CD backlog on 360milligram strength ?
Melnyk: To answer you question on .the 360 Cardizem CD,we are still in a backlog situation on that productbut as of literally yesterday we were assured that allof that should be fulfilled literally within the nextweek to two weeks . We expect that by the end ofthe year we will be fully out of any kind ofbackorder situation . . . .
157 . These statements were false and misleading for the same reason simila r
representations were false in July 29, 2003 and on October 3, 2003 . The Company would later
admit that no backorder existed and, according to Witness 1, during this period, wholesaler s
were stocked with up months of supply of Cardizem CD, including the 360 mg dose .
158 . Biovail also misleadingly reported revenues of generic products of $20.4 million,
in a desperate attempt to mask the magnitude of the earnings shortfall in the third quarter 2003 .
Significantly, Biovail failed to disclose that the $20 .4 million included a one-time credit from its
generic distributor, Teva, of $8.5 million . Revenues had actually dipped to about $12 million ,
but Biovail did not disclose this until November 28, 2003, when it filed form 6-K with the SE C
with its financial results for the third quarter 2003 .
159. During the call, Crombie made projections for the fourth quarter 2003, which h e
knew Biovail could not realistically meet . He stated, "we expect product revenue [in the fourt h
quarter 2003] to be in the range of $225 to $250 million . . . . Total revenue should be about $25
million greater . . . Our resulting EPS is therefore projected to be in the range in Q4 of 25 to 4 0
cents." Crombie had actual knowledge, however, that these projections were false an d
misleading because of the dramatically poor performance of Cardizem LA, the fictiona l
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backorder of Cardizem CD, and the fact that reported generic sales included a one-time credit of
$8 .5 million .
160. Finally, in addition to the multiple false excuses that Biovail and Melnyk
provided for missing third quarter 2003 earnings, Melnyk blatantly lied to the public about other
related topics, including his pledge of Biovail stock . Melnyk had pledged stock he owned in
Biovail as collateral against two outstanding personal lines of credit totaling $72 million . The
lines of credit were granted by two different banks for $55 million and $17 million .
Accordingly, a significant drop in the price of the stock would have required Melnyk to meet a
margin call by posting additional collateral . To avoid a margin call, Melnyk needed the price of
the stock to remain high . Melnyk therefore knew that if Biovail missed earnings the price of the
stock would collapse and that he would be forced to meet a margin call . Indeed, that is exactly
what happened when on October 3, 2003 l3iovail announced that it would miss third quarter
earnings by 23 cents per share . The stock price plummeted from $37 to $31 per share in one da y
and over the course of the next six weeks dropped further to approximately $20 per share .
161 . Because Melnyk knew that knowledge of the pledged shares would raise concerns
among analysts, Melnyk did not disclose it and lied about it . On the third quarter earnings
conference call on October 30, 2003, Banc of America analyst David Maris asked Melnyk if he
had pledged any shares to collateralize personal loans . Melnyk, unequivocally, said no .
Maxis: Eugene, have you or any entity that you're affiliatedwith sold any stock or entered into any agreementsuch as loans where the stock is pledged, likecollars or de rivative structures , where they are noteasily available by U.S . investors ?
Melnyk: No David, it is actually not - I don't know how that
is germane to the earnings call, but to answer your
question, the answer is no .
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162. Melnyk' s p rior fi lings with the SEC had failed to disclose the personal lines o f
credit and the fact that they had been collateralized with his shares of Biovail . Not until ten days
after the conference call, on November 10, 2003, did Melnyk file a form 13D with the SE C
disclosing the two lines of credit and the pledged shares .
3. U.S. and Canadian Authorities Commenced Investigations as a Result of
Biovail 's Third Quarter Earnings Disclosures -- the Company Lied About
the Existence of th e Canadian Investigation
163 . On November 20, 2003, the SEC commenced an informal inquiry into Biovail .
The SEC wrote a letter that day to Mark Thompson, Associate General Counsel of the Company,
which informed Biovail of the inquiry and requested that it preserve documents relating to 2002
and 2003 . The SEC specifically requested that Biovail preserve bills of lading and packing slips,
documents related to the shipment of goods, and all other documents concerning the preparation
of Biovail's financial statements during that period . The Company announced that it was th e
subject of an SEC inquiry in a press release the evening of November 20 . The next day, on
November 21, the stock price dropped from $23 .22 to $18 .89 per share, down almost 20% .
Investors lost over $600 million in market value. To this day, the investigation continues and it s
results have not been made public .
164. Biovail also became the subject of an investigation by the Ontario Securitie s
Commission (the "OSC") in November 2003 . The Company, however, did not disclose it and it s
spokesman, Howling, even lied about its existence . When reporters from the National Post, a
leading Canadian newspaper, interviewed him, they specifically asked whether the OSC wa s
conducting an investigation . Howling responded flatly: "No, there is no formal investigation ."
In response, on February 20, 2004, the National Post reported that Howling "dismissed talk of a n
Ontario Securities Commission probe of the company by saying no such investigation i s
underway."
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165. The false denial prodded the OSC to make a public statement on February 20,
2004, revealing that it had, indeed, begun a probe into suspicious trading activity in Biovail
stock. Michael Watson, director of the regulator's enforcement branch of the OSC, commented :
"We don't normally reveal the fact that we have an investigation ongoing . . . but we were
concerned that the article this morning [in which Howling denied its existence] had the potential
to create a misunderstanding among investors as to what the facts were ." Watson also explained,
"the company is aware of our concerns about trading in the shares of Biovail - enforcement staff
has had ongoing discussions with the company since November 2003 ."
166. Howling's lie, on top of the Company's recently revealed falsehoods, prompted
scathing reactions from commentators . As Steve Maich wrote in the National Financial Post on
February 21, 2004 :
Our Biovail Corp. disclosure decoder device has failed us again .
On Thursday, Biovail spokesman Ken Howling told the Financial
Post that, contrary to rumors swirling through the market, there
was no change in the company's dealings with regulators . In
response to a blunt question on whether the Ontario Securities
Commission is conducting an investigation of Biovail, Mr .
Howling responded: "No, there is no formal investigation . "
But a scant 24 hours after Howling uttered his reassurances, theOSC announced that it is "investigating suspicious trading activity,as well as conducting a full review of disclosure records, at Biovail
Corp." It seems the investigation has been on since November .
Can both of these statements be true? They can, if you speakBiovailese .
Who can forget the company's quarterly conference call lastOctober, when Banc of America analyst David Maris askedMelnyk if he had monetized his shares in the company . Mr .
Melnyk said no .
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Ten days later, Melnyk announced he pledged much of his Biovailstake as collateral on US$72-million in loans .
Again, it was a language problem.
But that wasn't the only misunderstanding surrounding the
company's earnings .
The company benefited from US$12 .5-million in product returnsand marketing credits, which it claimed as revenue . Anotherunusual US$8.5-million reimbursement reduced its costs, thus
padding earnings .
167. Duncan Stewart, technology portfolio manager of Tera Capital, similarly
commented, "over and over there is an ongoing pattern of non-transparency with the company ."
H. The Fraud is Completely Revealed : Biovail's Announcement of Its Fiscal 2003Results
168 . On March 3, 2004, in a press release and an analyst conference call, Biovai l
announced 2003 fourth quarter and full year financial results that once again fell dramaticall y
short of even the projected guidance issued just months before, on October 30, 2003 . Product
revenues for the fourth quarter were $168 .3 million, or 25% to 33% less than the October 30 ,
2003 projected range of $225 to $250 million . Promoted Product sales revenue for the fourth
quarter (which included Cardizem LA, Zovirax, and Teveten) was $33 .8 million, far less than the
$60.1 million sold in the third quarter, as a result of a reduction in Zovirax sales from $47 . 1
million in the third quarter to $11 .7 million in the fourth . Biovail had stuffed the channel with
Zovirax in the third quarter and essentially "stolen" sales from the fourth quarter . The Company
never disclosed the amount of Zovirax sales until May 14, 2004, when it filed its 2003 20-F with
the SEC. Cardizem LA sales of $20 .0 million in the fourth quarter were also weak given that in
the third quarter they had fallen to $6 .2 million, and that fourth quarter sales were still below
second quarter sales of $21 .6 million .
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169 . For the full year 2003, total revenues of S823 .7 million were also disastrously
low, missing the low end of the February 7 Press Release projected guidance of $950 million by
more than $125 million . Total product revenues of $633 million in 2003 were lower than in
2002, when they reached $646 million. In large part, the lower-than-expected sales of Cardizem
LA contributed to Biovail's meager results . Cardizem LA annual sales of $47 .7 million were
dismal in comparison with Melnyk's projection of $90-$100 million. Remarkably, throughout
the entire Class Period, Biovail never disclosed that Cardizem LA sales were failing to meet
expectations .
170. The March 3, 2004 press release also included additional shocking revelations .
First, the actual lost revenue from the Wellbutrin XL truck accident was not $15 to $20 million
but, rather, only $5 million -just as earlier observers predicted and could be estimated based on
Trooper Sciuto's account . The press release stated, "[a]fter a subsequent review of all of the
facts, the actual revenue loss from the accident was determined to be $5 .0 million ."
171 . Second, the $20 million Cardizem CD backorder had disappeared . Amazingly,
not only did Biovail fail to even mention that it had not obtained the $20 million in revenues
from the Cardizem CD backorder, but, more importantly, it announced that it had increased its
provisions for wholesalers to return previously-sold Cardizem CD stock by $20 million . The
Company explained that, "[t]he increase in the provision for returns is due to greater physician
acceptance of the benefits of Cardizem LA versus Cardizem CD and an anticipation of greater
conversion by Cardizem LA of Cardizem CD ." The disappearance of the $20 million
"backorder" coupled with Biovail's new expectation that it would lose $20 million in revenues to
product returns of Cardizem CD effectively meant that Biovail had lost $40 million in revenue
that analysts and investors had expected to see .
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172. Third, the financial results for the first three quarters of 2003 would have to b e
restated to reflect Biovail's failure to properly rook a loss under GAAP Significantly, firs t
quarter earnings per share were really S0 .36, not $0 .39 as previously reported . Since analysts
had expected Biovail to earn $0 .38 per share that quarter, the restatement meant that Biovail' s
results had come in below analysts' expectations for the first quarter 2003 .
173 . On March 3, 2004, Biovail also held its fourth quarter and full year 200 3
conference call . Melnyk and Crombie participated . Analysts were incredulous that the no w
famous $20 million backorder had simply vanished . Eliot Wilbur, from CIBC World Markets ,
asked, "So with respect to Cardizem CD do we have a backorder situation on any strengths, o r
has that been fully resolved?" Melnyk had to admit, "No . We don't have a backorder situation ."
174. Biovail's admission on March 3, 2004 that the Cardizem CD $20 millio n
backorder did not exist and that the truck involved in the traffic accident was carrying only $ 5
million worth of Wellbutrin XL, coupled with the announcement of the restatement, caused th e
stock price to fall . The day prior to the announcement, March 2, 2004, the stock closed at $20 .77
per share. The next day, after the March 3, 2004 disclosure, the stock price dropped to $18 .60 .
More than $345 million in market value had been wiped out .
175. On May 14, 2004, Biovail filed with the SEC Form 20-F, which included it s
audited financial results pursuant to GAAP for 2003 . The 20-F finally disclosed the break dow n
176. For the first time, it was evident that Cardizem LA sales had struggled, especiall y
in the third quarter, and that Biovail tried to disguise its problems with Cardizem LA by stuffing
the channel with Zovirax . Zovirax sales of $47 .1 million in the third quarter, represented 78% of
Core Products sales in that quarter (now renamed Promoted Product), while Cardizem LA sales
were only 10%. Biovail did not disclose that at the time it announced third quarter earnings, or
at any time prior to May 14, 2004 . The subsequent drop in the fourth quarter in Zovirax sales
from $47 .1 million to $11 .7 million is also clear evidence that Biovail sought to stuff the channe l
in the third quarter to make-up for the revenue shortfall from Cardizem LA . Additionally,
subsequent data released by analysts showed that in the fourth quarter of 2003, prescriptions o f
Zovirax ointment dropped from prescriptions in the prior year .
1 . Scienter
177. The facts set forth herein raise a strong inference that each Defendant acted wit h
scienter . Melnyk, Crombie, Miszuk and Howling had (i) actual knowledge that statements the y
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made, or were responsible for making, were false, and (ii) motive and opportunity. In addition,
(iii) there is circumstantial evidence raising a strong inference of scienter .
1 . Defendants Had Actual Knowledge of the Fraud And Flat -Out Lied
178 . As set forth in detail above, Defendants had actual knowledge of the fraud and
that the 2003 projections issued on February 7, 2003 were unreasonable and unattainable -
especially the Cardizem Family of Products projection of $140-S200 million in revenues .
Melnyk, Miszuk and Crombie attended meetings in which Biovail's team responsible for the
launch and sales of Cardizem LA specifically told them that revenues of Cardizem LA in 2003
would be, at most, $50 million. Ultimately, Cardizem LA 2003 revenues were $47 .7 million .
Nevertheless, and without any basis, Melnyk, Miszuk and Crombie used projections for
Cardizem LA revenues of $90-$100 million for 2003 . The Biovail employees directly
responsible for selling Cardizem LA team, including Witness 1, Slone and others, told these
Defendants that their projections were "obscene," "outlandish," and "beyond what [Biovail]
could in any realistic terms do ." Despite being so informed, Melnyk, Miszuk and Crombie
purposefully disregarded Witness 1's and Slone's warnings in order to satisfy Wall Street's
earnings expectations .
179 . The Company's financial projections also had no reasonable basis because, as
former employees explained (including Witnesses I and 2), these projections did not reflect
Biovail's true view of future product sales . Rather, Melnyk and the Finance Department set
sales targets based on the dollar figures needed to achieve Wall Street's earning expectations,
and then the Finance Department communicated those targets to Biovail's marketing directors .
180. Melnyk, Miszuk, Crombie and Howling also had actual knowledge that Biovail
had severe problems manufacturing Cardizem LA in the beginning of 2003 and that, as a result,
the Company did not have sufficient product to stock the channel to conduct a successful launch .
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According to Witnesses 2, 3 and 5, independently confirmed that senior product managers were
told at the March 15, 2003 Cardi7em LA launch meeting that there was not sufficient product
available, but that Biovail would go ahead with the launch on April 2, 2003 anyway. These
managers were also told not to disclose the manufacturing problems and lack of availability of
the drug to lower level sales representatives .
181 . Melnyk, Crombie, Miszuk and Howling also repeatedly flat-out lied in connection
with the Company's earnings and financial position, and knew at the time they made the
statements that they were lying . On October 30, 2003, Melnyk falsely hid the tact that he had
pledged Biovail shares as collateral for personal lines of credit in the amount of $72 million
when he was specifically asked in a conference call with analysts and denied it . Only ten days
later, on November 10, 2003, he filed a form 13D with the SEC admitting that he had pledged
shares of Biovail to obtain certain loans as of August 2003 . Melnyk, Crombie, Miszuk and
Howling also lied about the supposed Cardizem CD backorder of $20 million in the second and
third quarters of 2003 . At the end of both quarters, they claimed that revenue would have been
$20 million higher had the manufacturer of Cardizem CD, Aventis, supplied Diovail with the
product . They insisted that there was strong demand for Cardizem CD and that Biovail had
backorders of approximately $20 million, which would materialize the subsequent quarter .
Remarkably, in fourth quarter 2003 earnings conference call on March 3, 2004, Melnyk simply
admitted that the backorder did not exist .
182. The Wellbutrin XL trucking accident is another example of a blatant lie . Melnyk
and Crombie claimed in the October 3, 2003 conference call that Biovail had lost revenues of
about $15-$20 million . Five months later, the Company admitted that the amount of lost revenue
was only $5 million . Yet, Melnyk and Crombie knew or had access to the necessary informatio n
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on October 3 to know exactly how much product was in the truck : Biovail loaded the truck, had
the hill of lading, and all other documentation relating to the shipment . Moreover, Melnyk and
Crombie chose to inform themselves about the amount of product in the truck as of October 3 to
be able to assure the market that the lost product was worth $15-$20 million . Subsequently, on
October 8, they caused the Company to issue a statement re-iterating the accuracy of their
October 3 statements . Finally, the excuse set forth in their March 3, 2004 press release fo r
erroneously estimating the amount of Wellbutrin XL in the truck is preposterous . On March 3 ,
2004, the Company' s press release said,
In calculating the high end of the estimate range, Biovail also tookinto consideration the variables that analysts were generally using
in their models to estimate the Wellbutrin XL revenues, which
included typically higher pricing, higher percentage supply prices
and did not reflect the typical gross to net deductions . This
analysis with analyst estimates was completed to better explain
why revenue in third quarter 2003 would he less than previously
expected by analysts .
This is nonsense . If the Company had in fact been taking into account analysts assumptions, it
could have simply said so on October 3, 2003 . Instead, in its press release and conference call i t
told the public, in no uncertain terms, that the Company's revenues would decrease by $15 t o
$20 million as a result of the trucking accident .
183 . Howling lied about the OSC investigation into suspicious trading activity i n
Biovail stock prior to the Company's earnings announcements on October 3, 2003 and Octobe r
30, 2003. Howling specifically told the press on February 20, 2004 that there was no OS C
investigation . That same day, the OSC, in response to the blatant lie and in light of Howling' s
false denial, issued an extraordinary statement confirming that it was investigating suspiciou s
trades of Biovail stock .
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2. Defendants Had Motive and Opportunity to Commit Frau d
184 . The Individual Defendants had significant pecuniary interests in the price of the
stock and therefore had motive to artificially inflate its price .
(a) Melnyk
(i) Melnyk Had Lines of Credit Collateralized With Biovail Stock
185 . During the Class Period, Melnyk had Biovail shares that were pledged a s
collateral against two outstanding personal lines of credit totaling $72 million . Accordingly, a
significant drop in the price of the stock would require Melnyk to meet a margin call by posting
additional collateral . To avoid a margin call, Melnyk needed the price of the stock to remain
high. Melnyk therefore knew that if Biovail missed earnings, Biovail's stock price would
collapse and that he would be forced to meet a margin call . This is exactly what happened . On
October 3, 2003 Biovail announced that it would miss third quarter earnings by 23 cents per
share and the stock price plummeted from $37 to $31 per share in one day . Over the course of
the next six weeks Biovail's stock price dropped to approximately $20 per share .
(ii) Sales of Stock
186. Additional evidence of scienter includes Melnyk's significant sales of 3 .12
million shares of Biovail stock during the Class Period. On August 6, 7 and 8, 2003, Melnyk
sold 100,000 shares each day and pocketed $11 .43 million on total sales of 300,000 shares, at an
average price of $38 .10. Two months later, Biovail's stock price would plummet below $25 per
share . On December 9, 2003, Melnyk sold another 2 .7 million shares in a private transaction at
$18 per share for $48 .6 million . Then, on January 13 and 14, 2004, Melnyk again sold a
significant number of shares, 120,000, at an average price of $23 .67 per share, for proceeds of
$2 .84 million. In total, Melnyk sold shares worth $62 .87 million during the Class Period,
profiting handsomely from the inflated stock price at the expense of unsuspecting stockholders.
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(b) Crombie, Miszuk and Howlin g
187. Crombie, Miszuk and Howling also had pecuniary interests in Biovail stock and
an incentive to artificially inflate its price . Specifically, in September 2001, they had borrowed
money from the Company to purchase shares of Biovail . If the stock price declined below the
price at which they had originally purchased the stock, they would each take a loss and be forced
to repay the loan with personal funds because the sale of the stock would no longer cover the
principal of the loan . As of April 30, 2003, Crombie, Miszuk and Howling had each borrowed
approximately $2 .034 million to purchase 44,020 shares each . They therefore had a substantial
interest in making sure that the price of the stock remained above the average purchase price of
approximately $46.00 per share .
188 . For Crombie, Miszuk and Howling, this $2 .034 million loan represented a
significant asset . Between 2001 and 2003, Crombie's total compensation including salary and
bonus was approximately $243,000, $291,000, and $614,000 respectively . Miszuk's and
Howling's salaries and bonuses were even lower than Crombie's since they were not disclosed in
the Company annual filings with the SEC, which must disclose the total compensation of the five
highest paid employees . Based on the compensation of the lowest remunerated employee
disclosed in the 2003 20-F, Miszuk's and Howling's total compensation could not have exceeded
$472,000 in 2003, $238,000 in 2002, and $234,000 in 2001 .
189 . Because the stock price collapsed from almost $40 per share at the end o f
September 2003 to about $20 per share in late November, Crombie, Miszuk and Howling faced
serious difficulties to repay the loans . They each owned 44,020 shares, which at $20 per share
were worth approximately $880,400 . To repay their $2 .034 million loan, each defendant would
therefore have had to pay over $1 .1 million out of his own pocket . As of November 28, 2003,
according to the Company's 6-K filed that day, Crombie, Miszuk and Howling were "finalizin g
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arrangements to repay" the loans, which had been due since September 30, 2003. Ultimately ,
they were unable to repay the loan on their own and had to he hailed out by Melnyk . Biovail' s
2003 20-F disclosed that Melnyk had to give them personal loans so that they could satisfy their
obligations to the Company .
Al December 31, 2003, four executive officers [includingCrombie, Miszuk and Howling] were indebted to the Company inthe aggregate amount of $7,990,000 in connection with the ESPP
[Executive Stock Purchase Plan] loans . To facilitate repayment of
these loans, on December 31, 2003, Mr . Melnyk, Chairman of the
Board and Chief Executive Officer of Biovai1, in his individualcapacity, made loans to these executives in an amount equal to the
amount of their indebtedness to the Company and the ESPP loansfrom the Company were repaid . These executives pledged to Mr.Melnyk, as collateral for their loans, an aggregate of 176,080shares of the Company and their interest in the proceeds from
200,000 options to acquire shares of the Company having a strikeprice of $31 .00 per share . The loan arrangements provide that
there will be no recourse to these executives in addition to thecollateral pledged by them, except in certain instances-
3 . Circumstantial Evidence Raising a Strong Inference of Sciente r
190. There is also overwhelming circumstantial evidence raising a strong inference o f
scienter that Melnyk and the other Individual Defendants knew that, (i) the projections of
Cardizem LA were unreasonable and unattainable, (ii) Cardizem LA was experiencing sever e
manufactu ring problems in early 2003, and (iii) Biovail could not meet Wall Street' s
expectations in connection with Cardizem LA .
191 . Repeatedly, the Company and the Individual Defendants took actions and mad e
statements that obfuscated the disastrous sales of Cardizem LA. Most importantly, when Biovai l
announced it missed third quarter earnings on October 3, 2003, it failed to disclose that sales of
Cardizem LA fell from $21_6 million to $6 .2 million between the second and third quarters o f
2003 . Instead, the Company blamed the shortfall on a trucking accident (which ultimately ha d
considerable less impact than initially announced) and on a $20 million backorder of Cardizem
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CD that did not exist . Biovail did not disclose sales of Cardizem LA for 2003, on a quarterly
basis, until May 14, 2004, when it filed with the SEC its 2003 20-F . Only then did the public
first learn that in the third quarter 2003 Biovail's Cardizem LA sales were $6 .2 million .
192. In addition, when the Company announced third quarter earnings on October 30,
2003, it misleadingly grouped sales of Cardizcm LA with Zovirax and Tcvctcn as Core Products,
to give the impression that sales of Cardizem LA were higher than they actually were . This was
the first time that Biovail grouped revenues of these three products together. As a result,
investors did know that of the $60 .1 million in reported revenues from Core Products in the third
quarter, only $6.2 million came from Cardizem LA, while $47 .1 million were derived from
Zovirax . 1
193 . The $47 .1 million in revenues from Zovirax is additional circumstantial evidence
that Biovail purposefully hid Cardizem LA sales in the third quarter 2003 from investors .
Zovirax sales the prior quarter, the second quarter 2003, were less than half, $18 .0 million .
Zovirax sales in the subsequent quarter, the fourth quarter 2003, were only $11 .7 million. The
dramatically higher revenue of $47 .1 million in the third quarter strongly suggests that Biovail
stuffed the channel, and that it did that so that it could report Zovirax sales together wit h
Cardizem LA, and hide the dismal performance of the latter .
194. Additional circumstantial evidence of scienter includes the PLACE program .
Former employees of the Company said that the program was a smoke - screen designed to hide
the fact that Biovail did not have sufficient Cardizem LA product available for a full blown
launch. PLACE allowed the Company to ration the product and to sell it through a mail-order
pharmacy at first, before. it was to be distributed to the retail channel . The Company's
desc ription of the PLACE program was also misleading . Until late July 2003, when
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investigative articles by The Wall Street Journal and Barron 's reported that PLACE paid doctors
up to 51,500 to prescribe Cardizem LA, the Company described PLACE as a clinical experience
program. But the Company's former employees revealed that PLACE was regarded as nothing
more than monetary incentive program for doctors to prescribe Cardizem LA. Indeed, as soon as
PLACE was terminated, Cardizem LA revenues plummeted in the third quarter 2003 .
195 . Against this backdrop of repeated false and misleading statements regarding th e
performance of Cardizem LA, is Wall Street's intense focus on the launch of Cardizem LA and
the importance of this drug for Biovail's stock price . Biovail's emphasis in the spring and
summer of 2003 on telling investors that the launch was "successful" further suggests that the
Company and the Individual Defendants were keenly aware that a high stock price was directly
dependent on the Cardizem LA story . All of these facts, taken together, provide a strong
inference of scienter.
VI . DEFENDANTS FALSE AND MISLEADING STATEMENTSISSUED DURING THE CLASS PERIO D
196. On February 7, 2003, the inception of the Class Period, Biovail issued the
February 7 Press Release, reproduced in ¶ 48, supra .
197. Biovail and the Individual Defendants had actual knowledge, at the time, that the
statements made by them and contained in Biovail's February 7 Press Release were each
materially false and misleading for the following reasons, among others :
(a) Biovail had no reasonable basis to project revenue growth and EPS growth
of 30% and revenue for its Cardizem Family of products (CD, SR and LA)of $140 to $200 million for 2003 .
(i) Manufacturing of Cardizem LA had encountered severe problems,which were not disclosed, and Biovail did not have sufficientquantities of the drug to conduct a successful launch. At theMarch 2003 sales meeting in Florida, managers were told thatBiovail did not have sufficient quantities of Cardizem LA but thatthe launch would proceed as planned anyway;
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(ii) Biovail failed to properly disclose that it could not generaterevenues from sales of Cardiz.em T,A absent payments to
physicians to prescribe the drug ;
(iii) Biovail had high level of inventories of Cardizem CD in thechannel as of December 31, 2002, and could not have reasonably
projected that Cardizem CD would significantly contribute to 2003earnings ; and
(iv) Biovail knew that Cardizem CD sales would be cannibalized by
Cardizem LA and, except for the 360 mg dosage, Cardizem CDwas a genericized product .
(b) The cautionary language identifying the press release as a forward-looking
statement and identifying important risks and uncertainties was notmeaningful because : (i) it did not refer directly to any specific statement ;(ii) it was not sufficiently specific and indiscriminately listed any possiblerisk in general terms ; and (iii) Defendants had actual knowledge of
specific facts that invalidated the projections and had caused, and wouldnecessarily cause, Biovail not to meet its projections, including the factsthat the Company had severe problems manufacturing Cardizem LA andthat Biovail could not generate revenues from sales of Cardizem LAabsent payments to physicians to prescribe the drug .
198. On February 7, 2003, Biovail issued another press release which announced tha t
the FDA had approved Cardizem LA and that the commercial launch of the product wa s
scheduled for April 2, 2003, reproduced in ¶ 44, supra .
199. Biovail and the Individual Defendants had actual knowledge, at the time, that th e
statements made by them, and contained in Biovail's February 7, 2003 press release announcin g
the FDA approval of Cardizem LA, were each materially false and misleading because, among
other things, the Company had severe problems manufacturing Cardizem LA which woul d
severely impact Cardizem LA's launch and the revenues derived therefrom, and that Biovai l
could not generate revenues from sales of Cardizem LA absent payments to physicians t o
prescribe the drug .
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200. On March 4, 2003, Biovail conducted its fourth quarter and full year 200 2
earnings conference call . In response to the question, "I also wanted to know with respect to
Tiazac, given your ramping up [of] Cardizem LA here, are you running into any manufacturin g
constraints or anything of the like?" Crombie stated as follows :
With respect to the manufacturing, we are - we have just recentlycompleted the expansion of our Steinbach plant . We added morethan enough capacity to meet the needs of the GSK for Wellbutrin .We continue to manufacture in Puerto Rico, where most of ourTiazac and LA manufacturing is taking place . I think we're well
positioned .
[Question:] So there won't be competing resources between Tiazacsamples and LA samples?
[Crombie:] We're fine. We - in the last 12 months, we'reupgrading, and as you know, we acquired the Dorado, Puerto Ricofacility, which is from Johnson & Johnson . That's a substantialfacility. We have just, as I said, we have had a significantexpansion of our Steinbach facilities . That's more than enough inthe next several years of Wellbutrin production . We're good shapehere .
201 . Crombie had actual knowledge, at the time, that the statements he made in the
March 4, 2003 confcrcncc call were materially misleading because he failed to disclose that
Cardizem LA had encountered significant manufacturing problems, sufficient quantities of th e
drug were not available to conduct a successful launch, and Biovail could not sell its projecte d
revenues of Cardizem LA without making payments to doctors .
202. The March 4, 2003 conference call was preceded with the following cautionar y
language, as stated by the operator:
To the extent any statements made during this conference call
contain information that is not historical, these statements areessentially forward-looking and are subject to risks anduncertainties, including difficulty of predicting FDA approvals,acceptance and demand for new pharmaceutical products, theimpact of competitive products and pricing, new product
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development and launch, reliance on key strategic alliances,availability of raw materials and finished products, third parties,the regulatory environment, fluctuation in operating results andother risks detailed from time to time in the company's filings withthe Securities and Exchange Commission .
The cautionary language identifying certain statements as forward-looking statements and
identifying important risks and uncertainties was not meaningful because : (i) it did not refer
directly to any specific statement ; (ii) it was not sufficiently specific and indiscriminately liste d
any possible risk in general terms ; and (iii) Defendants had actual knowledge of specific fact s
that invalidated the projections and had caused, and would necessarily cause, Biovail not to mee t
its projections, including the facts that the Company had severe problems manufacturing
Cardizem LA and that Biovail could not generate revenues from sales of Cardizem LA absent
payments to physicians to prescribe the drug .
203_ On April 29, 2003, Biovail issued a press release announcing first quarter 200 3
earnings . The press release reported net income of $63 .0 million and diluted earnings per share
of $0.39, and stated, in relevant part, "Biovail Corporation today announced record financia l
results for the three month period ended March 31, 2003 and first uioiith performance o f
Cardizem LA, which is in excess of 20,000 prescriptions ." Melnyk was also quoted, as follows :
The successful relaunch of Teveten, the launch of Teveten HCTand the performance of Cardizem LA since its launch earlier thismonth demonstrates the effectiveness of our sales and marketingand product launch capabilities . . . . . Operationally, ourmanagement team has been strengthened, our pipeline programsare on track including the expected launch of Wellbutrin XL in the
second half of 2003 and we continue to explore numerousopportunities . These and other activities give us confidence thatwe will meet or exceed our objective of 30% earnings per sharegrowth for 2003 .
The April 29, 2003 press release also contained the following cautionary language regarding
forward-looking statements,
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"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995 . To the extent any statements made in this release containinformation that is not historical, these statements are essentially forwardlooking and are subject to risks and uncertainties, including the difficulty
of predicting FDA approvals, acceptance and demand for newpharmaceutical products, the impact of competitive products and pricing,new product development and launch, reliance on key strategic alliances,availability of raw materials, the regulatory environment, fluctuations inoperating results and other risks detailed from time to time in thecompany's filings with the Securities and Exchange Commission .
204. Biovail and the Individual Defendants had actual knowledge, at the time, that the
April 29, 2003 earn ings press release was false and misleading for the following reasons, among
others :
(a) The launch of Cardizem LA was not successful because it hadencountered significant manufacturing problems, sufficient quantities ofthe drug were not available for wide distribution, and sales to patients
outside the PLACE program were not strong .
(b) Biovail failed to properly disclose that it could not generate revenues fromsales of Cardizem LA absent payments to physicians to prescribe the drug .
(c) Biovail had no reasonable basis to reiterate that earnings per share wouldgrow by 30% in 2003 because ,
(1) revenues of Cardizem LA were in jeopardy for the reasons set
forth in subparagraphs (a) and (b) above;
(ii) Inventory levels of Cardizem CD in the channel remained high andBiovail could not have reasonably projected that Cardizem CD
would significantly contribute to 2003 earnings ;
(iii) Biovail knew that Cardizem CD sales would be cannibalized byLA and, except for the 360mg dosage, it was a genericized
product ;
(iv) revenues for the first quarter had only increased 23% and diluted
earnings per share 22% . Biovail was already behind schedule to
achieve its target of 30% revenue and diluted EPS growth by the
end of the year ; and
(d) Net income and earnings per share were artificially inflated by $5 .4
million and $0.03 per share, respectively, because Biovail failed to
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properly account for the loss resulting from a foreign exchange
adjustment, as required under GAAP .
(e) The cautionary language identifying the press release as a forward-lookingstatement and identifying important risks and uncertainties was notmeaningful because : (i) it did not refer directly to any specific statement ;
(ii) it was not sufficiently specific and indiscriminately listed any possiblerisk in general terms ; and (iii) Defendants had actual knowledge ofspecific facts that invalidated the projections and had caused, and wouldnecessarily cause, Biovail not to meet its projections, including the factsthat the Company had severe problems manufacturing Cardizem LA andthat Biovail could not generate revenues from sales of Cardizem LAabsent payments to physicians to prescribe the drug .
205 . On April 29, 2UU3, Biovail issued a separate press release in connection with the
launch of Cardizem LA, which stated, in relevant part, as follows :
Biovail Reports Positive Cardizem LA Launch Result s
TORONTO--(BUSINESS WIRE)--April 29, 2003--
Cardizem LA Prescriptions Exceed . 20,000
Retail Pharmacy Stocking Reaches 80 %
Managed Care Negotiations Cover 90% of U .S .
Live s
Biovail Corporation (NYSE :BVF)(TSX:BVF) reported today on the progress ofCardizem(R)LA (diltiazem HCI), the recently launched once-daily controlled releasemedication for the treatment of hypertension . Cardizcm(R)LA providea true 24 hourblood pressure coverage and delivers optimal levels of medication in the early
morning when patients may be at greater risk of an adverse cardiac event . LaunchedApril 2, 2003, over 20,000 prescriptions have been written for Cardizem(R)LA, morethan 45,000 pharmacies -- over 80% of the chain and independent pharmacies in the
U .S . -- now have Cardizem(R)LA in stock and Biovail is in active negotiations with 16of the largest managed care organizations that collectively represent more than 90%of total lives covered in the U .S .
Biovail is currently executing its planned multi-phased approach to the launch ofCardizem(R)LA . A clinical experience program entitled P .L .A .C .E . (Proving LAthrough Clinical Experience) is being conducted as a means of introducing the uniqueattributes of Cardizem(R)LA to patients through targeted physicians . To ensure theseprescriptions are filled prior to the completion of the retail stocking program, theprescriptions written during Phase I were filled through select mail order pharmacies .These mail order organizations do not report to IMS or NDC data tracking systems .As a result, there are 20,000 prescriptions filled over and above the total that appearsin the Ih1S or NDC prescription summary data .
Phase II of the Cardizem(R)LA launch plan began today and a high level retail
stocking campaign has been initiated . Product supply has been shipped to over45,000 pharmacies . Phase 11 also involves sales force detailing of an expanded targetgroup of doctors . In this phase, all prescriptions will be filled through the usual retailand mail order channels that report to IMS and NDC .
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"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995 .
To the extent any statements made in this release contain information that is nothistorical, these statements are essentially forward looking and are subject to risksand uncertainties, including the difficulty of predicting FDA approvals, acceptance anddemand for new pharmaceutical products, the impact of competitive products andpricing, new product development and launch, reliance on key strategic alliances,availability of raw materials, the regulatory environment, fluctuations in operatingresults and other risks detailed from time to time in the company's filings with theSecurities and Exchange Commission .
CONTACT : Biovail Corporation
Ken Howling, 905/286-300 0
SOURCE : Biovail Corporatio n
206. Biovail and the Individual Defendants had actual knowledge, at the time, that th e
April 29, 2003 press release relating to the Cardizem LA launch was materially false an d
misleading for the following reasons, among others :
(a) The launch of Cardizem LA was not successful because it hadencountered significant manufacturing problems and sufficient quantitiesof the drug were not available for wide distribution .
(b) Biovail failed to properly disclose that it could not generate revenues fromsales of Cardizem LA absent payments to physicians to prescribe the drug .
(c) The cautionary language identifying the press release as a forward-looking
statement and identifying important risks and uncertainties was notmeaningful because the cautionary language : (i) did not refer directly to
any specific statement; (ii) was not sufficiently specific and
indiscriminately listed any possible risk in general terms ; and (iii)Defendants had actual knowledge of specific facts that invalidated theprojections and had caused, and would necessarily cause, Biovail not tomeet its projections, including the facts that the Company had severeproblems manufacturing Cardizem LA and that Biovail could not generaterevenues from sales of Cardizem LA absent payments to physicians toprescribe the drug .
207. On April 29, 2003, Biovail held its first quarter earnings conference call . Melnyk
stated that,
We're now only four weeks post-launch [of Cardizem LA] and weare extremely pleased with the success we have had in this short
period of time. We surpassed our own expectations with respect to
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scrip numbers and getting positive feedback from physicians . Bothof these bode well for the future of this product. We've beentracking Cardizem LA against a post launch data from Tiazac, andthe early results clearly indicate that this product has hit the marketwith even greater force and momentum than Tiazac . We haveachieved a level of performance we initially didn't expect to
achieve until at least June. While these are still very early days,this result is encouraging .
Later in the call, in response to a question from an analyst, he added,
Our manufactu ring capacity was virtually dedicated to CardizemLA. We had in excess of 23,000 prescriptions written for the LAduring the launch period . And that's in four weeks to put that inperspective , the total launch is 2,700 sc rips and Tiazac which isbasically our benchmark was around 1,300 versus 23,000 . So thedemand was, you know , pretty dramatic .
Melnyk also reiterated 2003 guidance based on sales of Cardizem LA and Wellbutrin XL ,
stating, "I think there's no change in our guidance . There's in fact we're reiterating our guidanc e
for the year as far as FPS is concerned . You're going to see it coming out of product sales o f
mainly Wellbutrin and from Cardizem LA ."
208. In the same conference call, Howling stated ,
Diluted earnings per share for first quarter 2003 was 39 centsversus diluted earnings per share of 32 cents for first quarter 2002,reflecting an increase of 22% .
Furthermore, inventory levels in the distribution channel forbranded Tiazac are also reduced given the utilization rate for thisproduct being lower now due to the introduction of a genericversion of Tiazac . This strategic initiative was undertaken to aid inthe stocking campaign of Cardizem LA. . . . The results of this
strategy are already evident and in approximately four weeks wehave achieved retail stocking for Cardizem LA of over 40,000retail pharmacy outlets reflecting coverage of 80% .
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209. Melnyk and Howling had actual knowledge, at the time, that the statements the y
made in the April 29, 2003 conference call were materially false and misleading for th e
following reasons, among others :
(a) The launch of Cardizem LA was not successful because it hadencountered significant manufacturing problems, sufficient quantities ofthe drug were not available for wide distribution, and sales to patientsoutside the PLACE program were not strong .
(b) Biovail failed to properly disclose that it could not generate revenues fromsales of Cardizem LA absent payments to physicians to prescribe the drug .
(c) Biovail had no reasonable basis to reiterate that earnings per share wouldgrow by 30% in 2003 because ,
(i) revenues of Cardizem LA were in jeopardy for the reasons setforth in subparagraphs (a) and (b) above;
(ii) Inventory levels of Cardizem CD in the channel remained high and
Biovail could not have reasonably projected that Cardizem CD
would significantly contribute to 2003 earnings;
(iii) Biovail knew that Cardizem CD sales would be cannibalized byLA and, except for the 360mg dosage, it was a genericized
product ;
(v) revenues for the first quarter had only increased 23% and dilutedearnings per share 22% . Biovail was already behind schedule toachieve its target of 30% revenue and diluted EPS growth by the
end of the year ; and
(d) Diluted earnings per share were artificially inflated by $0 .03 per sharebecause Biovail failed to properly account for the loss resulting from aforeign exchange adjustment, as required under GAAP .
210. The April 29, 2003 conference call was preceded with the following cautionar y
language, as stated by the operator :
To the extent any statements made during this conference callcontain information that is not histo rical, these statements areessentially forward- looking statements and are subject to risks anduncertainties, including difficulty of predicting FDA approval,
acceptance and demand for new pharmaceutical products, the
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impact of competitive products and pricing, new productdevelopment at launch, reliance on key strategic alliances,availability of raw materials and finished products, third parties,the regulatory environment, fluctuations and other risks detailed
from time to time in the company's filings, with the Securities andExchange Commission .
The cautionary language identifying the press release as a forward-looking statement and
identifying important risks and uncertainties was not meaningful because the cautionar y
language: (i) did not refer directly to any specific statement ; (ii) was not sufficiently specific and
indiscriminately listed any possible risk in general terms ; and (iii) Defendants had actual
knowledge of specific facts that invalidated the projections and had caused, and would
necessarily cause, Biovail not to meet its projections, including the facts that the Company had
severe problems manufacturing Cardizem LA and that Biovail could not generate revenues fro m
sales of Cardizem LA absent payments to physicians to prescribe the drug .
211 . On May 7, 2003, Biovail issued the following press release :
Biovail's Cardizern LA Obtains Favorable Formulary Coverage ; Access to over74 Million Managed Care Live s
(TSX:BVF) announced today that it has achieved favorable formulary coverage forrecently launched Cardizem(R) LA, a graded once-daily controlled release medication
for the treatment of hypertension . Biovail has signed agreements giving Cardizem(R)LA a favorable formulary position with a number of Pharmacy Benefits Managers(PBMs) and Managed Care Organizations (MCOs) providing prescription healthcareservices for about 74 million individuals in the United States .
"This is an excellent position for Cardizem(R) LA to be in four weeks post-launch,"commented Eugene Melnyk, Chairman and Chief Executive Officer, BiovailCorporation . "The unique clinical profile of Cardizem(R) LA and the compelling
economic proposition it offers makes this medication a good choice for physicians,their patients, and the managed care industry . The favorable formulary coverageCardizem(R) I A has achieved to date will offer an additional opportunity forphysicians to continue to choose Cardizem(R) LA for their patients . "
For further information, please contact Ken Howling at 905-286-3000 or send inquiriesto it@biovail .com .
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"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995 .To the extent any statements made in this release contain information that is nothistorical, these statements are essentially forward looking and are subject to risksaw a icertdii ties, including the difficulty of prcdieting FDA approvals, acceptance anddemand for new pharmaceutical products, the impact of competitive products andpricing, new product development and launch, reliance on key strategic alliances,availability of raw materials, the regulatory environment, fluctuations in operatingresults and other risks detailed from time to time in the company's filings with theSecurities and Exchange Commission .
212 . Biovail and the Individual Defendants had actual knowledge, at the time, that th e
statements made in the May 7, 2003 press release were mate rially false and misleading for th e
following reasons, among others :
(a) The launch of Cardizem LA was not successful because it hadencountered significant manufacturing problems, sufficient quantities ofthe drug were not available for wide distribution, and sales to patientsoutside the PLACE program were not strong .
(b) Biovail failed to properly disclose that it could not generate revenues fromsales of Cardizem LA absent payments to physicians to prescribe the drug .
(c) The cautionary language identifying the press release as a forward-lookingstatement and identifying important risks and uncertainties was notmeaningful because the cautionary language : (i) did not refer directly toany specific statement ; (ii) was not sufficiently specific andindiscriminately listed any possible risk in general terms ; and (iii)Defendants had actual knowledge of specific facts that invalidated theprojections and had caused, and would necessarily cause, Biovail not tomeet its projections, including the facts that the Company had severeproblems manufacturing Cardizem LA and that Biovail could not generaterevenues from sales of Cardizem LA absent payments to physicians to
prescribe the drug .
213. On May 30, 2003, Biovail filed Fonn 6-K with the SEC for the three month s
ended March 31, 2003 . Miszuk signed the Form 6-K. The Company reported $63 .0 million in
net income and 50 .39 diluted earnings per share . Melnyk and Crombie each signed th e
certification required by the Sarbanes-Oxley Act of 2002 in Form 6-K, which explicitl y
represented that the financial statements reported in the 6-K were not false and misleading. The
Form 6-K, including the certifications, was false and misleading and was known to be materiall y
false and misleading at the time, or was recklessly disregarded thereby, because its financia l
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statements were not reported in compliance with GAAP. Specifically, Biovail applied an
inappropriate exchange rate to a Canadian dollar denominated long-term obligation and failed to
properly book the loss incurred due to the exchange rate fluctuation. The foreign exchange loss
was $5 .4 million, resulting in lower net income and earnings per share than originally reported ,
which were $57 .6 million and $0.36 per share . On May 14, 2004, Biovail filed an amended
Form 6-K for this period restating net income and earnings per share .
214. On July 29, 2003, Biovail issued a press release announcing second qua rter 2003
Biovail Corporation announced today record financial results forthe three month and six month periods ending June 30, 2003 . . . .Contributing to these favorable results was the launch of CardizemLA in April 2003, contributions from Wellbutrin XL, whichreceived an Approvable Letter in June 2003, growth fromCanadian product sales and the benefit from an economic interest
in the gross profits from the sales of a generic version of Prilosec .
Second quarter 2003 net loss of $1 .0 million and diluted loss pershare of $0.01 compared to net income of $62 .6 million anddiluted earnings per share of $0 .39 for second quarter 2002 .Excluding acquired research and development, second quarter2003 net income of $83 .2 million and diluted earnings per share of$0.52 both grew 33% versus comparable 2002 results of $62 .5million and $0 .39 per share. First half 2003 net income of $62 .0million and diluted earnings per share of $0 .39 compared to netincome of $115 .6 million and diluted earnings per share of $0 .70for the 2002 first half.
Product sales were favorably impacted in the second quarter andfirst half of 2003 by Canadian product sales revenues, the launchof Cardizem LA and by revenues related to the upcoming launchof Wellbutrin XL . . . . supply constraints related to brandedCardizem CD, which is manufactured by Aventis Pharmaceuticals ,
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resulted in a backorder situation of approximately $20 million .
Biovail is working with Aventis to rectify this .
Product sales revenues for second quarter 2003 of $157 .7
compared to $157.8 million for second quarter 2002 . First half
2003 product sales revenue of $284.6 million compared to first
half 2002 product sales revenue of $287.6 million . Product sales
were favorably impacted in the second quarter and first half of
2003 by Canadian product sales revenues , the launch of Cardizem
LA and by revenues related to the upcoming launch of Wellbutrin
XL. Generic product sales to Teva Pharmaceuticals were less thanexpected during the second quarter and are tracking well belowunderlying prescription trends for the primary products in this
portfolio . Biovail is working with Teva Pharmaceuticals to better
understand this inconsistency and resolve the situationexpeditiously .
"Safe Harbor" statement under the Private Securities Litigation
Reform Act of 1995 .
To the extent any statements made in this release containinformation that is not historical, these statements are essentiallyforward looking and are subject to risks and uncertainties,
including the difficulty of predicting FDA approvals, acceptanceand demand for new pharmaceutical products, the impact ofcompetitive products and pricing, new product development andlaunch, reliance on key strategic alliances, availability of raw
materials, the regulatory environment, fluctuations in operatingresults and other risks detailed from time to time in the company'sfilings with the Securities and Exchange Commission .
Melnyk is quoted in the press release , stating ,
The dramatic increase in market share for Biovail's Cardizemfranchise from 7% to over 11% in the 16 weeks since the launch of
Cardizem LA has surpassed our expectations .
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215. Biovail and the Individual Defendants had actual knowledge, at the time, that the
Tilly 29, 2003 press release was materially false and misleading for the following reasons, among
others :
(a) The launch of Cardizem LA had not been successful because it hadencountered significant manufacturing problems, sufficient quantities ofthe drug were not available for wide distribution, and sales to patientsoutside the PLACE program were not strong .
(b) Biovail failed to properly disclose that it could not generate revenues fromsales of Cardizem LA absent payments to physicians to prescribe the drug,and that as a result of the conclusion of the PLACE program there hadbeen a dramatic drop in the number of patients continuing to buyCardizem LA .
(c) Biovail had no reasonable basis to reiterate that earnings per share would
grow by 30% in 2003 because,
(i) revenues of Cardizem LA were in jeopardy for the reasons setforth in subparagraphs (a) and (b) above;
(ii) inventory levels of Cardizem CD in the channel remained high andBiovail could not have reasonably projected that Cardizem CDwould significantly contribute to 2003 earnings ;
(iii) the $20 million backorder of Cardizem CD was false ; and
(iv) revenues for the first and second quarter had only increased 23%and 17%, respectively. Biovail was already behind schedule toachieve its target of 30% revenue and diluted EPS growth by theend of the year .
(d) The $20 million backorder of Cardizem CD was false .
(e) Net income and earnings per share were artificially inflated by $3 .9million and $0.02 per share, respectively, because Biovail failed toproperly account for the loss resulting from a foreign exchange
adjustment, as required under GAAP .
(f) The cautionary language identifying the press release as a forward-looking
statement and identifying important risks and uncertainties was not
meaningful because the cautionary language: (i) did not refer directly to
any specific statement; (ii) was not sufficiently specific and
indiscriminately listed any possible risk in general terms ; and (iii )
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Defendants had actual knowledge of specific facts that invalidated the
projections and had caused, and would necessarily cause, Biovail not tomeet its projections, including the facts that the Company had severeproblems manufacturing Cardizem LA, Biovail could not generate
revenues from sales of Cardizem LA absent payments to physicians toprescribe the drug, and that as a result of the conclusion, of the PLACEprogram there had been a dramatic drop in the number of patientscontinuing to buy Cardizem LA .
216. On July 29, 2003, Biovail held its second quarter earnings conference call .
Melnyk stated that,
Second quarter 2003 net income was $83 million excluding theimpact of acquired research and development programsreflecting an increase of 33% over the same quarter last year .Diluted earnings per share excluding acquired R&D was 52 cents .
Melnyk also reiterated 2003 guidance based on sales of Cardizem LA and Wellbutrin XL,
stating, "I think there's no change in our guidance . There's in fact we're reiterating our guidanc e
for the year as far as EPS is concerned. You're going to see it coming from our product sales o f
mainly Wellbutrin and from Cardizem LA . "
217 . In the same conference call, Howling stated ,
We currently have a backorder position on Cardizem CD ofapproximately $20 million and are working with Aventis whosupplies this product to us to rectify the situation .
[W]e feel it is prudent to reduce our generic controlled releaseproduct sales and total product sales guidance for the balance ofthe year by $20 to $30 million . We are also upwardly revising thelow end of previously issued royalty and co-promote revenue
financial guidance by $20 million as our economic interest and thegross profits associated with the sales of a generic version ofPrilosec to continue to exceed our expectations . These twochanges leave total revenue guidance unchanged-
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218, Melnyk and Howling had actual knowledge, at the time, that statements the y
made in the July 29, 2003 conference call were materially false and misleading for the followin g
reasons, among others :
(a) The launch of Cardizem LA had not been successful because it had
encountered significant manufacturing problems, sufficient quantities ofthe drug were not available for wide distribution, and sales to patientsoutside the PLACE program were not strong .
(b) Biovail failed to properly disclose that it could not generate revenues fromsales of Cardizem LA absent payments to physicians to prescribe the drugand that as a result of the conclusion of the PLACE program there hadbeen a dramatic drop in the number of patients continuing to buy
Cardizem LA .
(c) Biovail had no reasonable basis to reiterate that earnings per share wouldgrow by 30% in 2003 because ,
(i) revenues of Cardizem LA were in jeopardy for the reasons setforth in subparagraphs (a) and (b) above ;
(ii) inventory levels of Cardizem CD in the channel remained high andBiovail could not have reasonably projected that Cardizem CDwould significantly contribute to 2003 earnings ;
(iii) the $20 million backorder of Cardizem CD was false ; and
(iv) revenues for the first and second quarter had only increased 23%
and 17%, respectively. Biovail was already behind schedule toachieve its target of 30% revenue and diluted EPS growth by theend of the year .
(d) Net income and earnings per share were artificially inflated by $3 .9million and $0.02 per share, respectively, because Biovail failed to
properly account for the loss resulting from a foreign exchangeadjustment, as required under GAAP .
219_ The July 29, 2003 conference call was preceded with the following cautionary
language, as stated by the operator :
To the extent any statements made during this conference callcontain information that is not historical, these statements areessentially forward-looking and subject to risks and uncertainties ,
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including difficulty of predicting FDA approvals, acceptance anddemand for new pharmaceutical products, the impact ofcompetitive products and pricing, new product development andlaunch, reliance on key strategic alliances, availability of rawmaterials and finished products, third parties, the regulatoryenvironment fluctuations in operating results and other risks
detailed from time to time in the company's filings with theSecurities and Exchange Commission .
The cautionary language identifying the press release as a forward-looking statement and
identifying important risks and uncertainties was not meaningful because the cautionary
language: (i) did not refer directly to any specific statement ; (ii) was not sufficiently specific and
indiscriminately listed any possible risk in general terms ; and (iii) Defendants had actual
knowledge of specific facts that invalidated the projections and had caused, and would
necessarily cause, Biovail not to meet its projections, including the facts that the Company ha d
severe problems manufacturing Cardizem LA, that Biovail could not generate revenues from
sales of Cardizem LA absent payments to physicians to prescribe the drug, and that as a result of
the conclusion of the PLACE program there had been a dramatic drop in the number of patients
continuing to buy Cardizem LA .
220 . On August 29, 2003, Biovail filed Form 6-K with the SEC for the three month s
ended June 30, 2003 . Miszuk signed the Form 6-K. The Company reported a $1 .0 million net
loss and $0 .01 diluted losses per share . Melnyk and Crombie each signed the certifications
required by the Sarbanes-Oxley Act of 2002 in Form 6-K, which explicitly represented that the
financial statements reported in the 6-K were not false and misleading . The Form 6-K, including
the ce rt ifications , was false and misleading and was known to be materially false and misleading
at the time , or was recklessly disregarded thereby, because its financial statements were not
repo rted in compliance with GAAP . Specifically, Biovail applied an inappropriate exchange rate
to a Canadian dollar denominated long-term obligation and failed to properly book the los s
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incurred due to the exchange rate fluctuation . The foreign exchange loss was $3 .9 million,
resulting in a higher net loss and loss per share than originally reported, which were $49 million
and $0.03, respectively. On May 14, 2004, Biovail filed an amended Form 6-K for this period
restating net loss and losses per share .
221 . On October 3, 2003, Biovail held a conference cull in which it announced that th e
Company would miss earn ings expectations for the third quarter. Melnyk stated that ,
Late yesterday afternoon we became aware that a truck carrying asignificant shipment of Wellbutrin XL from Biovail's SteinbachManufacturing Facility to GSK had been involved in a fatal, multi-vehicle accident just outside Chicago . This was a tragic accident
in which eight people lost their lives and another 16 were injured .. . . This accident will have a negative financial impact onBiovail's third quarter revenues .
Crombie stated that,
The unfortunate incident described by Eugene a moment ago, willhave a material negative effect on Biovail's third quarter revenueand earnings .
As a result of this accident, Biovail currently estimates that its totalthird quarter revenues from Wellbutrin XL will now be below $10million. It is not yet known whether or not the product involved inthe accident will be salvageable . This product must be sent back toour manufacturing facility for careful inspection to determine if theproduct still meets all applicable manufactu ring specifications andis completely safe for future sales .
Our Wellbutrin XL supply agreement gives Glaxo the right toreturn product that does not meet required manufacturing
specifications as approved by the Food and Drug Administration .
As it is unknown at this point whether or not the product involvedin the accident still meets all applicable manufacturingspecifications, Biovail will not be recording any revenue
associated with this shipment in Q3 .
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. . . . at the end of the second quarter, we announced that we had abackorder position on Cardizem CD in excess of $20 million .
This was caused by numerous factors . We have been very
conscious of trade inventory levels and we have come to theconclusion that where the smaller brand, such as Cardizem CD toinsure that we don't have backorders and that we meet demand, alarger amount of trade inventory is required .
We also had frankly expected an increase in the months ofinventory due to expected cannibalization from Cardizem LA .
Based on our source of prescription tracking, Cardizern LA isgaining most of its prescriptions not from switching fromCardizem CD, but from new patients being prescribed calciumchannel blockers . . . .
During the third quarter 2003, Biovail has been working diligentlywith Aventis, the supplier of brand Cardizem CD to alleviate thebackorder position . Considerable progress has been made duringthis quarter, with additional shipments from Aventis, alleviatingalmost half of the backorder position as of June 30th ; however,some additional shipments, which had been anticipated prior toSeptember 30th, actually arrived immediately following quarter
end. As a result, these additional shipments will not be included in
our third quarter 2000 revenue, 2003 revenue as hoped for, but willfavorably impact fourth quarter 2003 revenue .
In addition, because of the strong sales of Cardizem 360, thebackorder position of Cardizem CD has grown again, back up toalmost $20 million .
The impacts of the items discussed today will have the followingimpacts on Q3 revenue. First, the impact of Wellbutrin loss due tothe accident is in the range of $15 to $20 million . Second, theimpact of lost royalty revenue due to Prilosec is in the range of $20million . Third, the impact of Cardizem CD revenue is in the range
of $10 to $15 million . . . .
The net income impact from the above is in the range of $35 to $45
million or new EPS guidance 23 cents less than previous guidance
for a new total full diluted EPS guidance for Q3 of 2003 of
between 35 and 45 cents .
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Later in the call, in response to a question from an analyst, Melnyk added, "I think that th e
guidance that we've given in the past is in the 25% to 30% range, and I think, you know, th e
25% range is realistic . "
222. Melnyk and Crombie had actual knowledge, at the time, that the statements the y
made in the October 3, 2003 conference call were materially false and misleading for th e
following reasons, among others :
(a) Biovail had missed earn ings, in large part , because of lower sales ofCardizem LA, which dropped from $21 .6 million in the second quarter to$6.2 million in the third quarter of 2003 .
(b) The amount of lost revenue from the Wellbutrin XL traffic accident was$5 million, not $15 to $20 million .
(c) The $20 million backorder of Cardizem CD did not exist .
(d) Melnyk had no reasonable basis to state that earnings per share wouldgrow by 25% in 2003 because ,
(i) revenues of Cardizem LA were materially below projected annualsales by the end of the third quarter ;
(ii) the $20 million backorder of Cardizem CD was false ; and
(iii) revenues for the first and second quarter had only increased 23%and 17%, respectively . Biovail was already behind schedule toachieve its target of 30% revenue and diluted EPS growth by the
end of the year .
223 . The October 3, 2003 conference call was preceded with the following cautionary
language, as stated by the operator :
To the extent any statements made during this conference callcontain information that is not historical, these statements areessentially forward-looking and subject to risks and uncertainties,including difficulty of predicting FDA approvals, acceptance anddemand for new pharmaceutical products, the impact ofcompetitive products and pricing, new product development andlaunch, reliance on key strategic alliances, availability of rawmaterials and finished products, third parties, the regulator y
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environment fluctuations in operating results and other risks
detailed from time to time in the company's filings with theSecurities and Exchange Commission .
The cautionary language identifying the press release as a forward-looking statement and
identifying important risks and uncertainties was not meaningful because the cautionary
language: (i) did not refer directly to any specific statement ; (ii) was not sufficiently specific and
indiscriminately listed any possible risk in general terms ; and (iii) Defendants had actual
knowledge of specific facts that invalidated the projections and had caused, and would
necessarily cause, Biovail not to meet its projections, including the facts that the $20 million
Cardizem CD backorder did not exist, sales of Cardizem LA had dropped from $21 .6 million in
the second quarter to $6 .2 million in the third quarter of 2003, and Biovail had stuffed the
channel with Zovirax in the third quarter 2003 and could reasonable expect Zovirax sales to
dramatically fall in the fourth quarter .
224. On October 3, 2003, Biovail issued the following press release :
Biovail Provides Guidance on 2003 Third Quarter Results
(NYSE :BVF)(TSX:BVF) announced today that while it has not completed a final
compilation and analysis of its 2003 third quarter, preliminary results indicate thatrevenues will be below previously issued guidance and will be in the range of $215
million to $235 million and earnings per share of S0 .35 to $0 .45 for the three months
ended September 30, 2003 . Contributing significantly to this unfavorable variance wasthe loss of revenue and income associated with a significant in-transit shipment loss
of Welibutrin XL as a result of a traffic accident .
After leaving Biovail's Steinbach, Manitoba manufacturing facility on September 30,2003, a truck carrying a material shipment of Wellbutrin XL was involved in a multi-vehicle traffic accident at approximately 4 p .m . eastern standard time October 1, 2003near Chicago, Illinois . While this product may still be salable in the future, it must firstbe returned for inspection to Biovail's manufacturing facility in Manitoba to ensure it isstill within acceptable specifications . Revenue associated with this shipment is in therange of $10 to S20 million . The manufacturing cost value of this shipment was fullyinsured .
As a result of numerous recent inquiries, Biovail also comments on two additionalitems associated with third quartet income .
Biovail has an economic interest in the gross profits derived from the sales of ageneric version of omeprazole . The distributor of this generic omeprazole product hasannounced that it will provide significant price reductions on a retroactive basis t o
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wholesalers . This distributor has also indicated that it will be lowering its financialguidance for this product given lower pricing and for competitive reasons . Biovail'ssecond half 2003 financial guidance assumed that additional competition for genericemepraznle would seriously erode the financial benefit to the Company's interest inthe gross profits of this product . However, since Biovail shares in a percentage of thegross profit of this product, significant credits issued by the distributor during the, thirdquarter 2003 could have a negative effect on Biovail's participating interest of up to$15 million in net income. As well, it can be anticipated that there could be a fourthquarter 2003 negative income impact of $15 to $20 million .
During the third quarter 2003, Biovail was working with Aventis, the supplier ofbranded Cardizem GD product, to alleviate a back order position that existed at Ureend of June 2003 . Considerable progress was made in this regard during the thirdquarter 2003 and additional shipments from Aventis were received in Q3 however,further shipments, which had been anticipated prior to September 30, 2003 arrivedimmediately following quarter-end . As a result, these additional shipments will not beincluded in third quarter 2003 revenue as expected but will favorably impact fourthquarter 2003 revenue . During third quarter 2003, approximately half of the June 30,2003 back order position was alleviated however, due to continued strong sales ofCardizem CD 360 mg arid new orders for ttris dusaye strength, backorders haveincreased to approximately $18 million as at September 30, 2003 . We will continue towork with Aventis to rectify this situation expeditiously .
Biovail management it will host a conference call and webcast on Friday, October 3rd,2003 at 10:30 a.m . EST for company executives to discuss 2003 third quarterearnings guidance . Following the discussion, Biovail executives will address inquiriesfrom investment analysts .
A live webcast of this call will be available through the Investor Relations section ofthe Biovail web site, www .biovail .com . Alternatively, please dial 1-800-884-5695(North America .) ur 1-617-766-2960 fur Internatiuial callers, with pasacode29341981, to access the conference call . A replay of the conference call will beavailable until 7 :00 p .m . EST on Friday, October 10th, 2003 by dialing 1-888-286-8010 (North America) or 1-617-801-6888 for International callers, using access code,
45094403 .
Biovail Corporation is an international full-service pharmaceutical company, engagedin the formulation, clinical testing, registration, manufacture, sale and promotion ofpharmaceutical products utilizing advanced drug delivery technologies .
225. Biovail and the Individual Defendants had actual knowledge, at the time, that th e
October 3, 2003 press release was false and misleading for the following reasons, among others:
(a) Biovail had missed earnings, in large part, because of lower sales ofCardizem LA, which dropped from $21 .6 million in the second quarter to$6.2 million in the third quarter of 2003 ;
(b) The amount of lost revenue from the Wellbutrin XL traffic accident was
$5 million, not $15 to $20 million; and
(c) The $20 million backorder of Cardizem CD did not exist .
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226 . On October 30, 2003, Biovail issued a press release announcing third quarte r
2003 earnings, stating that ,
Total revenues increased 14% for the nine month 2003 period
versus the comparable 2002 period --
Total revenues for the three months ended September 30, 2003increased 3% to $215 .3 million versus the prior year comparable
period . . . . Third quarter 2003 revenue growth was favorablyimpacted by a 3% increase in Product Sales revenue versus theprior year comparable period primarily due to Biovail's launch ofCardizem LA, Teveten HCT and Zovirax Cream as well as theapproval and recent commercialization of Wellbutrin XL in the
U.S. marketplace .
In accordance with U.S . GAAP, third quarter 2003 net income was$13 .0 million and diluted earn ings per share of $0 .08 compared tonet income was [sic] $75 .0 million and diluted earn ings per shareof 50.49 for third quarter 2002 . In accordance with U.S. GAAP for
the nine month period ended September 30, 2003, net income was$75 .0 million and diluted earnings per share was $0.47 comparedto net income of $190 .6 million and ea rnings per share of $1 .18 forthe nine-month period ended September 30, 2002 .
Excluding certain items, third quarter 2003 net income of $34 .6
million and diluted earnings per share of $0.22 both declined by
53% versus third quarter 2002 net income and earnings per share
of $73.0 million and $0 .47 per share excluding the expense relatedto the ineffective portion of interest rate swaps . Excluding certainitems, net income of $180 .7 million and diluted earnings per share
of $1 .13 for the nine months ended September 30, 2003 decreased4% and 3% respectively compared to net income of $188 .7 millionand earnings per share of $1 .17 for the comparable 2002 periodsexcluding the ineffective portion of interest rate swaps and a write-down of assets related to a decline in the value of the Company'sinvestment in Hemispherx Biopharma Inc .
A late third quarter 2003 shipment of Wellbutrin XL involved inan accident outside of Chicago was returned to Biovail's facility on
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October 8, 2003 for inspection. No revenue was recognized from
this shipment in Q3 2003 . The shipment included both bulk andfilly packaged material . All hulk tablets, which are packaged in
plastic drums, were salvaged and have already been shipped toGSK. A small portion of the packaged goods (less than 1,000bottles) was effected [sic] in the accident and could not be re-shipped .
Product sales increased 3% for the third quarter to $180 .0 millionand I% to $464 .6 million for the nine months ended September 30,2003 . Core Product sales revenue was $60 .1 million or 33% oftotal Product Sales revenue for third quarter 2003 versus $18 .1million or 10% of total Product Sales revenue for the comparable2002 period. The increase in Core Product sales revenue reflectsthe launch of Cardizem LA, Teveten HCT and Zovirax Creamduring 2003 .
Wellbutrin XL product sales revenue was $8 .2 million for thirdquarter 2003 and $16 .3 million for the nine months endedSeptember 30, 2003 . Biovail receives a percentage of Glaxo's netsales as revenue for supplying trade supplies of Wellbutrin XLBiovail also is paid for bulk sample product that is produces andsupplies [sic ] to Glaxo . Samples are sold at a contractually agreedprice at approximately Biovail ' s manufacturing cost .
[Sales of generic products in the third quarter were $20 .4 million] .
227 . Biovail and the Individual Defendants had actual knowledge that the statement s
made in the October 30, 2003 press release were materially false and misleading for th e
following reasons, among others :
(a) Biovail had missed earnings, in large part, because of lower sales ofCardizem LA, which dropped from $21 .6 million in the second quarter to$6.2 million in the third quarter of 2003 .
(b) The amount of lost revenue from the Wellbutrin XL traffic accident was$5 million, not $15 to $20 million .
(c) The $20 million backorder of Cardizem CD did not exist .
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(d) Biovail obfuscated the fact that sales of Cardizem LA were $6 .2 million
by including Cardizem LA within Core Product sales of $60 .1 million,
which also included $47 .1 million of undisclosed Zovirax revenues . And ,
(f) Reported sales of generic products of $20 .4 million in the quarter includedan undisclosed one-time credit of $8 .5 million.
228 . On October 30, 2003, Biovail held a conference call in which it announced third
We expect product revenue [in the fourth quarter 2003] to be in the
range of $225 to $250 million . . . . Total revenue should be about
$25 million greater . . . . Our resulting EPS is therefore projected tobe in the range in Q4 of 25 to 40 cents .
229 . During the October 30, 2003 conference call, Melnyk responded to specifi c
questions from research analysts as follow :
Analyst: Second question, can you provide any further input
as to the Aventis Cardizem CD backlog on 360
milligram strength?
Melnyk: To answer your question on the 360 Cardizem CD,we are still in a backlog situation on that productbut as of literally yesterday we were assured that allof that should be fulfilled literally within the nextweek to two weeks . We expect that by the end ofthe year we will be fully out of any kind of
backorder situation . . . .
Analyst: Eugene , have you or any entity that you're affiliatedwith sold any stock or entered into any agreementsuch as loans where the stock is pledged, likecollars or de rivative structures , where they are noteasily available by U.S . shareholders ?
Melnyk: No [ ], it is actually not - I don't know how that isgermane to the earnings call, but to answer yourquestion, the answer is no .
- 106 -
230. Melnyk and Crombie had actual knowledge that the statements they made in th e
October 30, 2003 conference call were materially false and misleading for the following reasons ,
among others :
(a) Biovail had missed earnings, in large part, because of lower sales ofCardizem LA, which dropped from $21 .6 million in the second quarter to$6.2 million in the third quarter of 2003 .
(b) The $20 million backorder of Cardizem CD did not exist .
(c) Biovail obfuscated the fact that sales of Cardizem LA were $6 .2 millionby including Cardizem LA within Core Product sales of $60 .1 million,which also included $47 .1 million of Zovirax revenues.
(d) Melnyk had pledged shares of Biovail stock to collateralize two personallines of credit totaling $72 million .
(f) sales of generic products in the third quarter had fallen dramatically morethan publicly disclosed because revenues of $20 .4 million included anundisclosed one-time credit of $8 .5 million .
(g) Crombie had no reasonable basis to project product revenues of $225 to
$250 million for the fourth quarter 2004 because, among other things ,
(i) revenues of Cardizem LA had been dramatically lower thanexpected in the third quarter and demand was already soft ;
(ii) the $20 million backorder of Cardizem CD was false and Biovailwould not incur an additional $20 million in revenue in the fourthquarter ;
(iii) Biovail had stuffed the channel with $47 .1 million of Zovirax ; and
(iv) sales of generic products in the third quarter had fallendramatically more than publicly disclosed because revenues of$20.4 million included an undisclosed one-time credit of $8 .5million .
231 . The October 30, 2003 conference call was preceded with the following cautionary
language, as stated by the operator :
To the extent any statements made in this release containinformation that is not historical, these statements are forward-
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looking within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Actof 1934, as amended . We have based these forward-Innkingstatements on our current expectations and projections about future
events . Our actual results could differ, materially from those
discussed in or implied by these forward-looking statements .
Forward-looking statements are identified by words such asbelieve, anticipate, expect, intend, plan, will, and other similarexpressions . In addition, any staterneuts that refer to expectations,
projections or other characterizations of future events orcircumstances are forward-looking statements .
Forward-looking states include but are not necessarily limited torisks and uncertainties including the difficulty of predicting FDAapprovals, acceptance and demand for new pharmaceuticalproducts, the impact of competitive products and pricing, newproduct development and launch, reliance on key strategicalliances, availability of raw materials and finished products, thirdparties, the regulatory environment, fluctuation in operating resultsand other risks detailed from time to time in the Company's filingswith the Securities and Exchange Commission .
232. The cautionary language identifying the press release as a forward-lookin g
statement and identifying important risks and uncertainties was not meaningful because the
cautionary language: (i) did not refer directly to any specific statement; (ii) was not sufficiently
specific and indiscriminately listed any possible risk in general terms ; and (iii) Defendants had
actual knowledge of specific facts that invalidated the projections and had caused, and woul d
necessarily cause, Biovail not to meet its projections, including the facts that the $20 million
Cardizem CD backorder did not exist, sales of Cardizem LA had dropped from $2 1 . 6 million in
the second quarter to $6 .2 million in the third quarter of 2003, and Biovail had stuffed the
channel with Zovirax in the third quarter 2003 and could reasonable expect Zovirax sales to
dramatically fall in the fourth quarter .
-108-
VII . CLAIMS FOR RELIEF
COUNT ONE
For Violations of Section 10(b) of the Exchange Actand Rule IOb-5 Promulgated Thereunde r
233 . Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein .
234 . Throughout the Class Period, the Defendants, directly and indirectly, by the use of
means and instrumentalities of interstate commerce, the United States mails and a national
securities exchange, employed a device, scheme and artifice to defraud, made untrue statements
of material fact and omitted to state material facts necessary in order to make the statements
made, in the light of the circumstances under which they were made, not misleading, and
engaged in acts, practices and a course of business which operated as a fraud and deceit upon
Lead Plaintiffs and the members of the Class .
235 . The Company and the Individual Defendants, as the most senior officers of
Biovail during the Class Period, are liable as direct participants in all of the wrongs complained
of herein. Through their positions of control and authority, the Individual Defendants were in a
position to and did control all of the Company's false and misleading statements and omissions,
including the contents of all of its public filings and press releases as more particularly set forth
above. In addition, the false and misleading statements made in the Company's published
documents (including its press releases and publicly issued financial statements) constitute
"group published information," which the Individual Defendants were responsible for creating .
The Individual Defendants had direct involvement in the daily business of the Company and
participated in the preparation and dissemination of the Company's "group publishe d
- 109 -
documents ." The Company is liable for each of the statements of the Individual Defendant s
through the principles of respondeat superior .
236. As detailed above, the Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless disregard for the truth in
that they failed to ascertain and to disclose such facts, even though such facts were available to
them. Such material misrepresentations and/or omissions were made knowingly or recklessly
and for the purpose and effect of concealing Biovail's operating condition and future business
prospects from the investing public and supporting the artificially inflated price of its securities .
237. Lead Plaintiffs and the other members of the Class relied upon the Defendants '
statements and upon the integrity of the market in purchasing shares of Biovail common stock a t
artificially inflated prices .
238. In bringing these claims , Lead Plaintiffs and the members of the Class are entitled
to the presumption of reliance established by the fraud-on-the-market doctrine. At all times
relevant to this Complaint, the market for Biovail common stock was an efficient market for th e
following reason, among others :
(a) Biovail common stock traded on the New York Stock Exchange and
Toronto Stock Exchange, highly efficient markets. The average weekly trading volume
throughout the Class Period was 10 .5 million shares ;
(b) As a regulated issuer, Riovail filed periodic public reports with the SEC ;
(c) Biovail common stock was followed by numerous securities analyst s
employed by major brokerage firms, such as J .P . Morgan, Credit Suisse First Boston, Morgan
Stanley, Salomon Smith Barney, and Merrill Lynch, among others, who wrote reports that wer e
- 110 -
distributed to the sales force and certain customers of their respective brokerage firms . Each of
these reports was publicly available and entered the public marketplace ;
(d) Biovail regularly issued press releases, which were carried by national and
international news wires. Each of these releases was publicly available and entered into th e
public marketplace; and
(e) The market price of Biovail common stock reflected the effect of new s
disseminated in the market .
239. As a direct and proximate cause of the wrongful conduct described herein, Lea d
Plaintiffs and the other members of the Class suffered damages in connection with thei r
purchases of Biovail common stock. Had Lead Plaintiffs and the other members of the Clas s
known of the material adverse information not disclosed by the Defendants, or been aware of th e
truth behind the Defendants' material misstatements, they would not have purchased Biovai l
stock at artificially inflated prices .
240. This claim was brought within two years after the discovery of the fraud and
within five years of the making of the statements alleged herein to be materially false and
misleading.
241 . By virtue of the foregoing, the Defendants violated Section 10(b) of the Exchange
Act and Rule I Ob-5 promulgated thereunder and are liable to Lead Plaintiffs and the members o f
the Class, each of whom has been damaged as a result of such violations .
COUNT TW O
For Violations of Section 20(a) of the Exchange Ac t
242. Plaintiff repeats and realleges each and every allegation contained above as i f
fully set forth herein .
- 111 -
243 . Throughout the Class Period, the Individual Defendants, by virtue of their
positions, stock ownership and/or specific acts described above, were controlling persons within
the meaning of Section 20(a) of the Exchange Act.
244. The Individual Defendants had the power to, and did, directly and indirectly ,
exercise control over Biovail, including the content and dissemination of statements which the
Lead Plaintiffs allege are false and misleading . The Individual Defendants were each provided
with and had access to reports, filings, press releases and other statements alleged to b e
misleading prior to and/or shortly after they were issued and had the ability to prevent the
issuance or correct the statements . The Individual Defendants had direct and supervisory
involvement in the day-to-day operations of the Company and induced Biovail to engage in th e
acts constituting violations of the federal securities laws, as set forth in Count One above .
245. Individual Defendant Melnyk exercised control over the Company through his
positions as Chief Executive Officer and Chairman of the Board of Directors, and through his
ownership during the Class Period of approximately 14 .5% of all outstanding shares of Biovail
stock. Additionally, as alleged above, Melnyk had the power to control the Company's financial
targets, public statements, and strategies for marketing its products, and exercised such control
throughout the Class Period, both, by directing that various strategies be adopted and by directly
disseminating false information to the market or causing such information to be disseminated
through press releases and analyst conference calls . Finally, Melnyk exercised control over
Biovail's financial reporting through his management responsibilities and his certification of the
Company's fraudulent financial statements .
246. Individual Defendant Crombic exercised control over the Company through his
positions as Chief Financial Officer and Senior Vice President . He controlled the contents of
- 112 -
Biovail's public financial statements and exercised further influence through his certification of
those statements- Additionally, as alleged above, Crombie had the power to control the
Company's financial targets and public statements about those targets, and he exercised such
control throughout the Class Period by directing that certain targets be adopted and personally
making and participating in various statements about the Company's performance, both, through
press releases and analyst conference calls .
247. Individual Defendant Miszuk exercised control over the Company through hi s
positions as Vice President, Controller and Assistant Secretary of Biovail . Additionally, Miszuk
exercised control over Biovail's financial reporting by signing Biovail's false financial
statements . As alleged above, Miszuk also had the power to control the Company's financial
targets and public statements about those targets, and he exercised such control throughout the
Class Period by directing that certain targets be adopted and by participating in the dissemination
of false information to the market .
248 . Individual Defendant Howling exercised control over the Company through hi s
position as Vice President of Finance . By virtue of this position, Howling had the power to
control and did control Biovail's financial reporting and financial policies . Additionally, as
alleged above, Howling had the power to control and did control Biovail's public statements
about its condition through his involvement in the preparation of press releases, his participation
in analyst conference calls, and his direct statements to the media.
-113-
PRAYER FOR RELIE F
WHEREFORE, Lead Plaintiffs pray for judgment as follows :
A. Determining this action to be a proper class action pursuant to Rule 23 of the
Federal Rules of Civil Procedure;
B. Awarding Lead Plaintiffs and members of the Class compensatory damages ;
C . Awarding Lead Plaintiffs and members of the Class pre judgment interest an d
post judgment interest, as well as their reasonable attorneys' fees, expert witness fees, and costs ;
D. Awarding extraordinary, equitable and/or injunctive relief as permitted by law ,
equity and the applicable federal statutory provisions, pursuant to Rules 64 and 65 of the Federal
Rules of Civil Procedure, and any appropriate state law remedies, to assure that the Class has a n
effective remedy ; and
E. Awarding such other relief as this Court may deem just and proper .
J. Erik Sandstedt (JS-9148)Javier Bleichmar (JB-0435)
1285 Avenue of the AmericasNew York, New York 10019
Tel : 212-554-1400
Fax: 212-554-144 4
Co-Lead Counsel and Counsel for Co-LeadPlaintiff Ontario Teachers 'Pension PlanBoard
By: Sanford P. Dumain (SD-8712)Ann M . Lipton (AL-3010)One Pennsylvania Plaza
New York, New York 10119Tel : 212-594-5300Fax: 212-868-122 9
Co-Lead Counsel and Counsel for Co-Lead
Plaintiff Local 282 Welfare Trust Fun d
- 114 -
CE1 TIF1CAT1O N
Michael Padfield. Legal Counsel, Investments of the Ontario Teachers' Pension PlanBoard ("Ontario Teachers") declares, as to the claims asserted under the federal securities laws,that :
1 . He has reviewed the complaint and authorized its filing .
2. Ontario Teachers did not purchase the securities that are the subject of this actionat the direction of its counsel, Be rnstein Litowitz Berger & Grossmann LLP, or to participate inthis private action .
3. Ontario Teachers is willing to serve as a Lead Plaintiff and class representative onbehalf of the Class, including providing testimony at deposition and trial, if necessary.
4. Ontario Teachers ' transactions in the securities of Biovail Corp. that are thesubject of these actions are in the chart attached hereto .
5 . Ontario Teachers is currently serving as Lead Plaintiff only in the followingactions filed during the 3W - year period preceding the date on which this certification is signed :
In re Cable & Wireless plc Securities Litigation
6. Ontario Teachers initially sought to serve as a representative party for a class inthe following actions filed under the federal securities law during the three years preceding thedate of this Certification but was not appointed in favor of other investors with fW mor esignificant losses :
In re AOL Time Warner Inc . Securities LitigationIn re Tenet Healthcare Corp . Securities Litigation
In re Federal I-tome Loan Mortgage Corp . Securities Litigation
7 . Ontario Teachers has sought to serve as a representative party on behalf of a class
in the following actions filed during the three years preceding the date of this Certification :
Campagnuola v. Nortel Networks Corporation et al (pending)
8. Ontario Teach era will not acccpt any payment for sei ving as a representative part y
on behalf of the class beyond its pro rata share of any recovery, except such reasonable costs andexpanses (including lost wages) relating to the representation of the class as ordered or approvedby the court .
I declare under penalty of perjury that the foregoing is true and correct to the best of myknowledge. Exerayted this JZI~'day of June 2004 .
ficha adfie lLegal Counsel, Investment sOntario Teachers' Pension Plan Board
Ontario Teachers' Pension Plan Board Transactieais in tovatl Corporation
•Sha es were parchised on both the Toronro and 'm York exchanges . Where applicable, prices were cmrerted to US using the conversion rate on the date of the trantavtion.
Ontario TeachesR' Pennien Plan Board Transaetisns in Biovail Corporation
''Shares vtkre purchased on both de Toronto and New York eThanges . Where a?plicable, prices were cars•ertea to US using the ocnversion We on the date of the transaction .
PLAINT'S CERTiCATIONPURSUANT TO FEDERAL SECXTRX'17B_S_X A VM
The Trustees of the Local 282 Welfare Trust Fund declares the following as to the claims asserted, or to beasserted, under the federal securities laws :
1 . My name is 4 M lc. Lc L.
2 . I have reviewed the Biovail Corporation complaint prepared by Milberg Weiss Bershad & SchulmanLLP, whom I designate with Friedman & Wolf as counsel for the Local 282 Welfare Trust Fund in thisaction for all purposes .
3 . As a Trustee and Fiduciary of the Local 282 Welfare Trust Fund, I have been duly authorized by theLocal 282 Welfare Trust Fund to commence litigation against Biovail Corporation and the other
defendants.
4, The Local 282 Welfare Trust Fund did not acquire Biovail Corporation at the direction of plaintiff'scounsel or in order to participate in any private action under the federal securities laws .
5 . The Local 282 Welfare Trust Fund is willing to sew as a lead plaintiff either individually or as part of agroup. A lead plaintiff is a representative party who acts an behalf ofother class members in directing theaction, and whose duties may include testifying at deposition and trial .
6 . The Local 282 Welfare Trust Fund will not accept any payment for serving as a representative partybeyond its pro rata share of any recovery, except reasonable costs and expenses, such as lost wages andtravel expenses, directly related to the class representation, as ordered or approved by the court pursuantto law.
7. The Local 282 Welfare Trust Fund has not sought to serve or served as a representative party for a classin an action under the federal securities laws within the past three years ,
8 . The Local 282 Welfare Trust Fund understands that this is not a claim form, and that its ability to share inany recovery as a member of the class is unaffected by its decision to serve as a representative party .
9. Since February 7, 2003, the Local 2$2 Welfare Trust fund has made the following transactions in BiovailCorporation and will provide records of those transactions upon request :
N . of S13ares v 1 ell bate Price Per S' =
See attached Schedule A
Please use and attach additional pages if necessary .
I declare under penalty of perjury that the foregoing is true and correc t
Executed this / day of__N -12004 LOCAL 282 WELFARE TRUST FUND
Bsignature
PLAE W'S CERTrfICAVONPURSUANT TO FEDERAL SECUBMS LAWS
The Trustees of the Local 282 Welfare Trust Fund declares the following as to the claims asserted or to beasserted, ceder the federal securities laws:
1 . My name is A0.* ~.,A ~t~R. c" a
2. I have reviewed the Biovail Corporation complaint p repared by Milberg Weiss Bershad & SchulmanLLP, whom I designate with Friedman & Wolf as counsel for the Local 282 Welfare Bust Fund in thisaction £oz all purpusc .
3. As a Trustee and Fiduciary of the Local 282 Welfare Trust Fund, I have hccn t1uly a„thr . ed by theLocal 282 Welfare Trust Fund to commence litigation against Biovail Corporation and the otherdefendants.
4. The Local 282 Welfare Trust Fund did not acquire Biovail Corporation at the di rection of plaintiffsCounsel or in owlet to paxtiaip5to in any private action under the fedEra1 scot it a taws .
5 . The Local 282 Welfare Trust Fund is willing to serve as a lead plaintiff either individually or as part of agroup. A lead plaintiff is a representative party who acts an behalf of other class members in directing theaction, and whose duties may irncludc testifying at deposition and trial .
~. The Local 282 Welfare Trust Fund will not accept any payment for serving as a representative partybeyond its pro rata share ofany recovery, except reasonable costs and expenses, such as lost wages andtravel expenses, directly related to the class representation, as ordered or approved by the court pursuantto law.
7 . The Local Z82 Welfare Trust Fund has not sought to serve or served as a representative party fo r a classin an action under the federal securities laws within the past three years.
The Local 2.82 Welfare Trust Fund understands that this is not a claim form, and that its ability to share inany recovery as a member of the class is unaffected by its decision to serve as a rcpresentativc party .
9 . Since February 7,200-1, the Local 282 Welfare Trust Fund has made the following transactions in BiovailCorporation and will provide records of those transactions upon request
No . of SIMIPS 1~uv/Soil ate ?rice Per Share
See attached Schedule A
Please use and attach additional psgcs if necessary.
I declare under penalty of perjury that the foregoing is true and correct
Executed this t S ' clay of w. . , 2004 LOCAL 282 WELFARE TRUST FUND
The City of Dearhom Heights Act 345 Pension System (`Plaintiff'), by Michael E. Moco,Esq., attorney-in-fact, hereby certifies that the following is true and correct to the best of his
knowledge, information and belief:
1 . Plaintiff has reviewed the complaint and authorized its filing
2. Plaintiff did not purchase the securities that are the subject of this action at the
direction of its counsel or to participate in this private action .
3 . Plaintiff is willing to serve as a representative party on behalf of a class, includingproviding testimony at deposition and trial, if necessary .
4. The Plaintiff's transactions in the securities of Biovail Corp . that are the subject oftb.is-action-are as follows:
5. Plaintiff is currently serving as Lead Plaintiff only in the following actions filedduring the 3-year period preceding the date on which this certification is signed :
Vans Inc . -• C .D. Cal. - Case No . 04-CV-0043 1
6. Plaintiff initially sought to serve as a representative party for a class in the
following actions filed under the federal securities law during the three years preceding the date
of this.Certification but was not appointed in favor of other investors with more significant
losses :
Motorola - Southern District of New York -- Case No . 02-ClV-10209 .
Lexzxaark - E .D. Kentucky - Case No . 01-485-JMH .
Watson Pharmaceuticals - C.D . Cal . - 03-cv-09628
El Paso Corp . -- S.D. Texas - H-02-271 7
Polaroid - Southern. District of New York - Case No. 03 CV 7499 ;
District of Massachusetts - Case No. 03 CV 11884
Doc4 : 1.42595 vern : 13077 :1546 1
7. Plaintiff will not accept any peymani lot serv ing ee a mprc5cnUalve party nn
hehatf of the class beyond its pro tats share of any recover , except such ressonablc coots andexpenses (including lost wages) relating to the representation of the class e. ordc rod or ap+mvesiby r1 cotut .
I declared under the penalty of pcrjtuy that the for€going is true and corroct to the best ofmy knowindge . Executed this 18 ' of June, 2004.
The City of D born Hei Act 345 nsion SysicmAno rney-In-Foe Michael MoeoVanOverbeke , Michaud & Timmony, P .C .
. .. . Door: j a2fo9 vcD i 'nn, i}id
CERTIFICATION
{L k/ I ~%~ , ("Plaintiff) declares as to theclaims asserted under the federal securities laws, that:
Plaintiff has reviewed the complaint and authorized its filing .
2 . Plaintiff did not purchase the securities that are the subject of this action at thedirection of its counsel or to participate in this private action .
3 . Plaintiff is willing to serve as a class representative on behalf of the Class,including providing testimony at deposition and trial, if necessary .
4. The Plaintiffs transactions in the securities of Biovail Corp . that are the subject ofthis action are in the chart attached hereto .
5. Plaintiff is currently serving as Lead Plaintiff only in the following actions filedduring the 3-year period preceding the date on which this certification is signed :
6. Plaintiff initially sought to serve as a representative party for a class in thefollowing actions filed under the federal securities law during the three years preceding the dateof this Certification but was not appointed in favor of other investors with far more significantlosses:
7 . Plaintiff has sought to serve as a representative party on behalf of a class in thefollowing actions filed during the three years preceding the date of this Certification :
8 . Plaintiff will not accept any payment for serving as a representative party onbehalf of the class beyond its pro rata share of any recovery, except such reasonable costs andexpenses (including lost wages) relating to the representation of the class as ordered or approvedby the court-
I declare under penalty of perjury that the foregoing is true and correct to the bet nfmyki juwledge. Executed this /5- day of June 2004 .
ry i"
86022y2
CERTIFICATION FORM ATTACHMENT
DR. WILLIAM A. EMERY
TRANSACTIONS FOR BIOVAIL CORPORATIO N
TRANSACTION
(Buy OR SELL)
PURCHASE (TSX)
PURCHASE (TSX)
TRADE DATE No. OF SHARES PRICE PER SHARE10/16/2003 200 $38.40 (CANADIAN)
10/30/2003 300 $27.50 (CANADIAN)
W :\DATA\WPDATA\CASES\BIOVAIL\CERT ATTACHMENT .DOC
CEBx1FCC A11o1 J OF NAMED PLAINTIFFFVI Iwg 'O fF1~EItAL SBC11DRU.AWS
That :Vera A . Hays ('Plaintiff') declares as to the claims asserted under the federal sccurttics Laws,
1, Plaintiff. has reviewed the complaint and authorized its filing ,
2. Plaintiff did nor purchase the securities that are the subject of this action at thedirection of its counsel or to participate in this private action .
3, Piainti is willing to se rve as a class representative on behalfof the Class, includingproviding testimony at deposition and trial, if n ocessa y _
-4 . Plaintiffs transactions in the securi ties of Biovail Corp. that are the subject of thi ,actions are as follows:
Purchased 100 shares B VF on 5113/03 @ 541 .3 S/sh.Sold 100 shares BVF on 2/24/04 @$19 .52J
5. Plaintiff is currently serving as Lead Plaintiff only in the following actions filed duringthe 3-year period preceding the date on which this certification is signed
6. Plaintiff initially sought to serve as a representative part for a class in the followingactions filed under the federal securities law during the three years preceding the- date of thisCertification but was not appointed in favor of other investors with far more significant ., losses'.
7. Plaintiff has sought to serve as a representative party on behalf of a class in theFollowing actions filed during the three years preceding the date of this Cerrification :
8, Plaintiff will not accept any payment for serving as a represemative parry oubehalfufthe class beyond its pro rata share of any recovery, except such reasonable costs and expenses(including lost wages) relating to the representation of the class as ordered or approved by the court .
I declare under penury of perjury that the forcgcrng is vue and correct to the best of .toyknowledge,
Fier uted thir/. " ay of June, 2004
xl~/Plaia~t.ifC
CERTIFICATION OF NAMED PLAINTIFFPURSUANT TO FEDERAL SECURITIES I .AV1I
Robert Atkinson ("Plaintiff') declares as to the claims asserted under the federal securitieslaws; that :
Plaintiffhas reviewed the complaint and authorized its filing .
2 . Plaintiff did not purchase the securities that are the subject of this action at thedirection of its counsel or to participate in this private action .
3, Plaintiff is willing to serve as a class representative on behalf of the Class, includingproviding testimony at deposition and trial, if necessary .
4. Plaintiff's transactions in the securities of Biovail Corp . that are the subject of thisaction are as follows :
Purchased 200 shares BVF :TSE on 5/12/03 C 57.23/sh .Sold 14 shares BVF:TSE on 6/10/03 @ 65,22/sb
5. Plaintiff is currently serving as Lead Plaintiff only in the following actions fi led during
the 3-year period preceding the date on which this certification is signed :
6. Plaintiff initially sought to serve as a representative part for a class in the followingactions filed under the federal securities law during the three years preceding the date of thisCertification but was not appointed in favor of other investors with far more significant losses :
7, Plaintiff has sought to serve as a representative party on behalf of a class in thefollowing actions filed during the three years preceding the date of this Certi fication :
8. Plaintiff will not accept any payment for serving as a representative party on behalf ofthe class beyond its pro rata share of any recovery, except such reasonable costs and expenses(including lost wages) relating to the representation of the class as ordered or approved by the court ,
I declare under penalty of perjury that the foregoing is true and correct to the best of
my knowledge .
Executed this rte? day of June, 2004
Plaint
CERTIFICATION
S. D . Gokhale ("Plaintiff') declares as to the claims asserted under the federalsecurities laws, that .
Plaintiff has reviewed the complaint and authorized its filing .
2 . Plaintiff did not purchase the securities that are the subject of this action atthe direction of its counsel or to participate in this private action .
3 . Plaintiff is willing to serve as a class representative on behalf of the Class,including providing testimony at deposition and trial, if necessary .
4. The Plaintiff's transactions in the securities of Biovail Corp . that are the
subject of this action are in the chart attached hereto .
5 . Plaintiff is currently serving as Lead Plaintiff in no actions filed during the3-year period preceding the date of this Certification .
6. Plaintiff has not sought to serve as a representative party for a class in
actions (other than the current action) filed under the federal securities law during thethree years preceding the date of this Certification .
7. Plaintiff will not accept payment for serving as a representative party onbehalf of the class beyond its pro rata share of any recovery, except such reasonable costsand expenses (including lost wages) relating to the representation of the class as ordered
or approved by the court .
I declare under penalty of perjury that the foregoing is true and correct to the bestof my knowledge . Executed this day of June 2004 .
S . D. Gokhale
ATTACHMENT TO CERTIFICATIO N
Biovail Corp . Secu rities Litigation
Name : S . D . Gokhal e
(please complete only one trade per line)
Date of# of Shares Purchased (P) / Sold (S) Price Per Share Purchase/Sale
50 (P) $38 .35 08/07/03
50 (S) 22.35 02/09/04
0
CERTIFICATION OF NAMED PLAINTIFFPURSUANT TO FEDERAL, SECURITIES LAW$
Mohammed Sobhan, ("Plaintiff') declares as to the claims asserted under the securitieslaws, that :
]. . Plaintiff has reviewed the complaint and authorized its filing .
2 . Plaintiff did not pwchase the securities that are the subject of this action at thedirection of its counsel or in order to participate in this private action .
3 . Plaintiff is willing to serve as a class representative on behalf of the Class,including providing testimony at deposition and trial, if necessary.
4. Plaintiffs transactions in the securities of Biovail Corp . That arc the subject ofthis action arc attached hereto .
5 . Plaintiff is currently serv ing as Lead Plaintiff only in the following actions filedduring the three year period preceding the date on which this Certification is signed: nlo-/(
6 . Plaintiff initially sought to serve as a representative party for a class in thefollowing actions filed under the federal securities laws during the three years preceding the date
of this Certification but was not appointed in favor of other investors with far more significantlosses: Watic-
0
7. Plaintiffhas sought to serve as a representative party on behalf of :a class in thefollowing actions during the three years preceding the date of this Certification : '/ w C-
8. Plaintiff Will not accept any payment for serving as a representative party onbehalf of the Class beyond itr pro r to SI]are [)f Any TPE ovary, except such reason .ble torts andexpenses (including lost wages) directly relating to the representation of the Class as ordered orapproved by the Court .
I declare under penalty ofperjury that the foregoing i~ true correct to thc b of myknowledge . Executed this / day of June, 2004 . ,~
